How to Measure Economic Performance. Measures of Economic Performance Economic Measures: –Inflation –Unemployment –Growth (GDP) –Balance of Payments

How to MeasureHow to Measure

Economic PerformanceEconomic Performance

Measures of Economic PerformanceMeasures of Economic Performance

Economic Measures:Economic Measures:

– InflationInflation– UnemploymentUnemployment– Growth (GDP)Growth (GDP)– Balance of Balance of

PaymentsPayments– Exchange RateExchange Rate

Non-Economic Non-Economic Measures:Measures:

– Quality of LifeQuality of Life– EnvironmentEnvironment– HealthHealth– EducationEducation

Measures of Economic PerformanceMeasures of Economic Performance

Economic Growth (GDP)Economic Growth (GDP)

Economic Growth (GDP)Economic Growth (GDP)

Gross Domestic Product:Gross Domestic Product:– The value of output of goods and services The value of output of goods and services

produced in the UK during one yearproduced in the UK during one year– Primary, secondary and tertiary sectorsPrimary, secondary and tertiary sectors– Real versus nominal outputReal versus nominal output– Can be viewed as being national income, Can be viewed as being national income,

national output or aggregate demand (AD)national output or aggregate demand (AD)– GDP per capita – GDP divided by the population GDP per capita – GDP divided by the population

(GDP per head)(GDP per head)

Economic Growth (GDP)Economic Growth (GDP) Potential GrowthPotential Growth – the overall capacity of the – the overall capacity of the

economy (i.e. what the economy could produce economy (i.e. what the economy could produce if it used all its resources)if it used all its resources)

Actual GrowthActual Growth – the annual percentage increase – the annual percentage increase in outputin output

Nominal GrowthNominal Growth – the growth in output not – the growth in output not including any adjustment for price changes expressed including any adjustment for price changes expressed as ‘current prices’ (the price reigning at the time of as ‘current prices’ (the price reigning at the time of the measurement)the measurement)

Real GrowthReal Growth – growth in GDP adjusted to take – growth in GDP adjusted to take account of changes in the price level – expressed account of changes in the price level – expressed as ‘constant prices’as ‘constant prices’

The Business CycleThe Business Cycle

Growth (NY)

Time

Potential Growth

Actual Growth

Recession/Slump

Growth/Upturn

Boom/Overheating

Decline/slowdown

InflationInflation

InflationInflation

A persistent rise in prices in an economy A persistent rise in prices in an economy over a period of timeover a period of time

Now measured by the HICP (CPI) Now measured by the HICP (CPI) Inflation does not fall – it slows down or Inflation does not fall – it slows down or

speeds up! (If inflation in 2003 was 3% speeds up! (If inflation in 2003 was 3% and in 2004 is 2% it still means prices and in 2004 is 2% it still means prices have risen by an average of 2% over the have risen by an average of 2% over the last year!)last year!)

A fall in the price level is termed ‘deflation’A fall in the price level is termed ‘deflation’

InflationInflation

Anticipated and Unanticipated Anticipated and Unanticipated inflationinflation:: – affects the outcome of economic affects the outcome of economic

decision making – if anticipated, decision making – if anticipated, changes in prices can be changes in prices can be accommodated, if unanticipated can accommodated, if unanticipated can cause shocks and problems to arisecause shocks and problems to arise

InflationInflation

Causes of Inflation:Causes of Inflation:– Demand-PullDemand-Pull – where aggregate – where aggregate

demand (AD) rises at a faster rate demand (AD) rises at a faster rate than aggregate supply (AS)than aggregate supply (AS)

– Cost-PushCost-Push – increases in costs – increases in costs (labour, raw materials, imported (labour, raw materials, imported costs, etc.) that cause a leftward costs, etc.) that cause a leftward shift in AS shift in AS

InflationInflation

The effects of inflation:The effects of inflation: Seriousness of the effect depends on the extent Seriousness of the effect depends on the extent

to which the inflation is anticipatedto which the inflation is anticipated– Menu costsMenu costs – the cost of having to change prices – vending – the cost of having to change prices – vending

machines, labels, etc.machines, labels, etc.– Wealth costsWealth costs – inflation affects those on fixed incomes and – inflation affects those on fixed incomes and

redirects wealth to those in strong bargaining positions or redirects wealth to those in strong bargaining positions or with physical assetswith physical assets

– Planning costsPlanning costs – businesses uncertain about future price – businesses uncertain about future price changes may be reluctant to invest – hits economic growthchanges may be reluctant to invest – hits economic growth

– CompetitivenessCompetitiveness – inflation at a higher rate in the UK than – inflation at a higher rate in the UK than elsewhere hits domestic competitiveness and affects the elsewhere hits domestic competitiveness and affects the balance of paymentsbalance of payments

– Social stability - Social stability - At very high rates, confidence in the At very high rates, confidence in the currency is eroded and production and exchange can be currency is eroded and production and exchange can be stifled – can lead to food riots, looting and violencestifled – can lead to food riots, looting and violence

UnemploymentUnemployment


Various definitions:Various definitions:– The number of people of working age The number of people of working age

who are without a jobwho are without a job– The Claimant Count – those actively The Claimant Count – those actively

seeking work and claiming benefitseeking work and claiming benefit– ILO (International Labour Organisation) ILO (International Labour Organisation)

measure– the number of people measure– the number of people available for work and actively seeking available for work and actively seeking employmentemployment


UK Unemployment and the claimant count, 1992-2002Source: Office for National Statistics (http://www.statistics.gov.uk/cci/nugget.asp?id=165) (Crown copyright material is reproduced with the permission of the Controller of HMSO and the Queen's Printer for Scotland.)


Causes of unemployment:Causes of unemployment:– Frictional UnemploymentFrictional Unemployment – where people become – where people become

unemployed between jobsunemployed between jobs– Demand Deficient UnemploymentDemand Deficient Unemployment – where AD is less – where AD is less

than ASthan AS– Technological UnemploymentTechnological Unemployment – caused where people – caused where people

are put out of work by changes in technologyare put out of work by changes in technology– Seasonal UnemploymentSeasonal Unemployment – caused by the seasonal – caused by the seasonal

nature of some types of employment – e.g. holiday resortsnature of some types of employment – e.g. holiday resorts– Real Wage or Classical Unemployment Real Wage or Classical Unemployment – caused by – caused by

wage rates being held above market clearing levelswage rates being held above market clearing levels– Structural UnemploymentStructural Unemployment – caused by changes to the – caused by changes to the

structure of industry in the economy – e.g. the decline of structure of industry in the economy – e.g. the decline of the coal, iron and steel industriesthe coal, iron and steel industries


Costs of unemployment to the Costs of unemployment to the economy:economy:– Lower tax revenuesLower tax revenues– Higher benefit paymentsHigher benefit payments– Social costs: crime, vandalism, family Social costs: crime, vandalism, family

breakdowns and social welfare support, breakdowns and social welfare support, regional decayregional decay

– Opportunity cost of lost potential outputOpportunity cost of lost potential output


Costs of unemployment to the Costs of unemployment to the individual:individual:

– De-skillingDe-skilling– Loss of self-esteemLoss of self-esteem– Lower income – reduced purchasing power Lower income – reduced purchasing power

and lower standard of livingand lower standard of living– Effects on the family unitEffects on the family unit– Increase in likelihood of stress related Increase in likelihood of stress related

illnesses and mental breakdownillnesses and mental breakdown

Balance of PaymentsBalance of Payments


Measures economic transactions Measures economic transactions between UK residents and the rest of between UK residents and the rest of the world:the world:– Trade in goodsTrade in goods– Trade in servicesTrade in services– Income flows from investmentsIncome flows from investments– Financial flows – shares, loansFinancial flows – shares, loans– Foreign aidForeign aid


Current Account:Current Account:– The trade in goods The trade in goods – The trade in servicesThe trade in services– Income flowsIncome flows– Current transfers Current transfers

Capital Account:Capital Account:– Sale and purchase of capital assets and non-Sale and purchase of capital assets and non-

produced or non-financial assetsproduced or non-financial assets Financial Account:Financial Account:

– Trade in financial assetsTrade in financial assets

Exchange RatesExchange Rates


The price of one currency in terms The price of one currency in terms of another – the amount of one currency of another – the amount of one currency that has to be given up to purchase that has to be given up to purchase another currencyanother currency

Exchange rates determined by the Exchange rates determined by the demand and supply of a currency demand and supply of a currency on foreign exchange marketson foreign exchange markets

Demand determined by the purchase Demand determined by the purchase of exports, supply by the purchase of exports, supply by the purchase of importsof imports


Floating Exchange Rates:Floating Exchange Rates:– Where the rate is determined by the Where the rate is determined by the

interaction of supply and demand of the interaction of supply and demand of the currency with no intervention by government currency with no intervention by government or other agencies in the marketor other agencies in the market

‘‘Dirty’ or ‘Managed’ Floating:Dirty’ or ‘Managed’ Floating:– Where the exchange rate is allowed to float Where the exchange rate is allowed to float

freely but intervention by governments or freely but intervention by governments or other agencies is carried out to manipulate the other agencies is carried out to manipulate the rate within some desired bandrate within some desired band


Fixed Exchange Rates:Fixed Exchange Rates:– Where the rate is fixed or pegged Where the rate is fixed or pegged

to another currency or asset (such to another currency or asset (such as gold – the as gold – the ‘Gold Standard’‘Gold Standard’) – ) – intervention may be necessary to intervention may be necessary to maintain the rate or economic policies maintain the rate or economic policies to influence the strength of economic to influence the strength of economic growthgrowth


Adjustable Peg SystemAdjustable Peg System– A managed exchange rate – rate fixed in A managed exchange rate – rate fixed in

the short term but has the short term but has the possibility of devaluation the possibility of devaluation or revaluation if necessaryor revaluation if necessary

Non Economic MeasuresNon Economic Measures

Social InvestmentSocial Investment InfrastructureInfrastructure – roads, communication – roads, communication

networks, bridges, railways, airports, portsnetworks, bridges, railways, airports, ports Education Education –– schools, colleges and universitiesschools, colleges and universities Hospitals/HealthHospitals/Health – primary and secondary – primary and secondary

care, health education, disease and accident care, health education, disease and accident prevention, number of doctors per head, prevention, number of doctors per head, access to health careaccess to health care

Water/SewerageWater/Sewerage HousingHousing – affordable and accessible housing – affordable and accessible housing

to meet the needs of those in search of homes to meet the needs of those in search of homes and employmentand employment

EnvironmentEnvironment Pollution Pollution – land, air, sea and noise– land, air, sea and noise WasteWaste – waste disposal and waste – waste disposal and waste

managementmanagement NatureNature – areas of outstanding beauty, – areas of outstanding beauty,

national parks, wildlife, ecology, sites national parks, wildlife, ecology, sites of special scientific interestof special scientific interest

Land UseLand Use – planning regulations, – planning regulations, building regulationsbuilding regulations

TaxationTaxation Tax BurdenTax Burden – the amount of tax – the amount of tax

paid by the population – direct paid by the population – direct and indirect taxationand indirect taxation

IncentivesIncentives – aimed at encouraging – aimed at encouraging enterprise, business development enterprise, business development and creativityand creativity

Quality of LifeQuality of Life Material WealthMaterial Wealth – telephones, fridges, – telephones, fridges,

computers, cars, etc.computers, cars, etc. Mental StateMental State StressStress – caused by employment, – caused by employment,

unemployment, travel, etc.unemployment, travel, etc. CrimeCrime – crime prevention, crime – crime prevention, crime

reduction, monitoring of crime reduction, monitoring of crime and perceptions of crimeand perceptions of crime

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How to Measure Economic Performance. Measures of Economic Performance Economic Measures: –Inflation –Unemployment –Growth (GDP) –Balance of Payments