Transcript Measuring_Economic_Performance

Measuring Economic
Performance
Data
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Reliable measures needed for tracking variables to
observe how economy is evolving over time
Most economic statistics used by economists are
collected & published by the ONS (Office of National
Statistics)
Data on other countries are published by the IMF
(International Monetary Fund), the World Bank & the
United Nations
How reliable is data? Some take so long to be
assembled and are subject to later revision
Real v. nominal measures
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Unit of measurement = money values
BUT prices change from year to year
Prices that are current when transaction
takes place = nominal values
‘Real’ values remove the effect of price
changes – constant prices
Take volumes produced each year & value
these quantities that prevailed in some base
year
Index number
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A device for comparing the value of a variable
in one period or location with a base
observation
e.g. the retail price index (RPI) measures the
average level of prices relative to a base
period
A form of ratio that compares the value of a
variable with some base point
Example
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250g pack of butter last year was 80p, this year it is
84p
How can the price between the two periods be
compared?
Either calculate % change (5)
Or calculate an index number
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100 x 84 / 80 = 105
Current value/base value x 10
Useful method of expressing a range of variables
where you want to show the value relative to a base
period
Check understanding
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Page 114, Exercise 9.1
Consumer Price Index
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CPI = a measure of the general level of
prices in the UK, adopted as the
government’s inflation target since December
2003
Inflation = the rate of change of the average
price level: for example, the percentage
annual rate of change of the CPI
Target = 2.0%
How is CPI compiled?
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Based on a bundle of about 650 goods & services
measured at different points in time
Compiled through the ‘Family Expenditure Survey’ collects data on a monthly basis from a sample of
7,000 households across the country
Some prices are observed directly in randomly
selected shops
Data used to create an index based on 1996 = 100
Items are weighted to reflect typical spending habits
Weights are updated on a yearly basis
Retail Price Index (RPI)
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The traditional measure of the average level
of prices in the UK
Similar approach to CPI, but differences in
content of basket of goods & services
covered and in sample of population
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RPO excludes pensioner households & the
highest-income households, whereas the CPI
does not
Some differences in the way calculations are
carried out
Problem with CPI & RPI
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Both used fixed weights in calculating overall
index
If one particular item rises in price more
rapidly than others, consumers may
substitute an alternative, cheaper product
Index will not pick up this substitution effect &
will overstate the price level in terms of cost
of living
RPIX
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RPI excluding mortgage interest payments
Chosen because if interest rates are used to
curb inflation, including mortgage interest
payments in the inflation measure will be
misleading
Why CPI?
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Believed to be a more appropriate indicator
for evaluating policy effectiveness
Uses same methodology as is used in other
European Union countries, so useful for
making international comparisons of inflation
See page 117 for data
GDP
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Gross domestic product is a measure of an
economy’s output
First calculate nominal GDP – output
measured in terms of the prices of the year in
question
Convert nominal to real GDP – GDP adjusted
for inflation
Example
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Nominal GDP of a country may rise from £800 billion in 2008 to £880
billion in 2009. This would appear to suggest that output has risen by
10%
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Part of this increase may be due to a rise in the price level
To calculate the rise in the volume of output:
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GDP figure x base year price index
current year price index
If price index in 2008 was 100 and 104 in 2009, real
GDP was:
£880 billion x 100
= £846.15 billion
104
i.e. in real terms GDP has risen by 5.77%
($46.15 billion/$800 billion x 100%)
Question
Between 2000 & 2006 the UK’s GDP
measured in current prices increased from
£1,003,297m to £1,299,622m. Over this
period the price index rose from 100 to 116.
(a)
(b)
(c)
Calculate the % increase in nominal GDP
Calculate the real GDP for 2006
Calculate the percentage increase in real
GDP
Measuring economic growth
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Usually measured by the annual percentage
change in real GDP
Circular flow of income shows that a
country’s output is equal to the country’s
income & its expenditure
GDP can be calculated by totalling up the
output, income or expenditure of the country
& economic growth can be calculated by
changes in any of these
Careful!
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When using the output method, avoid double
counting
Do not count the output of raw materials and then
again in the value of finished products
In the income method, only incomes that have been
earned in return for providing goods & payments are
included
Transfer payments (e.g. job seeker’s allowance &
pensions) are not included
Expenditure method – remember to include exports
but exclude imports
GDP Deflator
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An implicit price index showing the
relationship between real & nominal
measures of GDP, providing an alternative
measure of the general level of prices in the
economy
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Price index = 100 x GDP at current prices
GDP at constant prices
Production & Productivity
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Production is what is produced – when real GDP increases, it
means that output has risen
Labour productivity is output per worker hour
Changes in productivity can be used to assess a country’s
economic performance
If productivity rises by more than wages, labour costs will fall & a
country can become more price competitive
Production & productivity can move in opposite directions
 when an economy is expanding, production will rise.
 If less skilled workers have to be recruited to make extra output,
productivity may fall
 Economy may appear to be doing well, but ability to sustain rises
in output may be questionable
Interpreting changes in real
GDP
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An increase in real GDP suggests that living
standards are improving as more goods &
services are being produced
But a rise in output may be exceeded by a
rise in population – assess real GDP per
capita
Problems may occur when comparing real
GDP between countries & over time
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Informal economy – unrecorded economic activity
Informal (hidden) economy
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Economic activity that is not recorded or registered
with the authorities in order to avoid paying tax or
complying with regulations, or because the activity is
illegal
Existence distorts a range of economic data
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Rate of inflation in informal economy usually lower than
that in rest of economy – official measures overstate
inflation
Work undertaken means that official data understates
employment
Tax revenue is lower than would be possible if all activity
were taxed
Living standards
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Consider composition of real GDP
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More capital goods, people will not feel
immediately better off, though they will be in the
long run
Output may rise because of an increase in
‘regrettables’, e.g. increasing the police force to
match rising crime
Uneven distribution of income/wealth
Higher GDP at the cost of longer working hours
If pollution rises, GDP does not fall
Does money make you happy?
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According to Professor Richard Layard of the LSE,
people do not seem to get happier as they get richer
because:
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People quickly get used to an improvement in their living
standards
Happiness is closely related to their income relative to
others rather than their absolute income
A study asked Harvard students whether they would prefer
$50,000 per year while others got half that income, or
$100,000 per year while others earned twice that income
Alternative measure
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Claimant count = monthly count of those
claiming unemployment-related benefits
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Job seeker’s allowance or
Sign on to claim national insurance credits in
order to maintain pension eligibility
Claimants ‘must declare that they are out of work,
capable of, available for and actively seeking work
in the week in which their claim is made’
Measuring inflation
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Inflation = the rate at which the average level
of prices rise
Creeping inflation
Accelerating inflation
Hyperinflation
Deflation
Consumer Price Index



CPI = a measure of the general level of
prices in the UK, adopted as the
government’s inflation target since December
2003
Inflation = the rate of change of the average
price level: for example, the percentage
annual rate of change of the CPI
Target = 2.0%
How is CPI compiled?






Based on a bundle of about 650 goods & services
measured at different points in time
Compiled through the ‘Family Expenditure Survey’ collects data on a monthly basis from a sample of
7,000 households across the country
Some prices are observed directly in randomly
selected shops
Data used to create an index based on 1996 = 100
Items are weighted to reflect typical spending habits
Weights are updated on a yearly basis
Retail Price Index (RPI)


The traditional measure of the average level
of prices in the UK
Similar approach to CPI, but differences in
content of basket of goods & services
covered and in sample of population


RPO excludes pensioner households & the
highest-income households, whereas the CPI
does not
Some differences in the way calculations are
carried out
Problem with CPI & RPI



Both used fixed weights in calculating overall
index
If one particular item rises in price more
rapidly than others, consumers may
substitute an alternative, cheaper product
Index will not pick up this substitution effect &
will overstate the price level in terms of cost
of living
RPIX


RPI excluding mortgage interest payments
Chosen because if interest rates are used to
curb inflation, including mortgage interest
payments in the inflation measure will be
misleading
Why CPI?



Believed to be a more appropriate indicator
for evaluating policy effectiveness
Uses same methodology as is used in other
European Union countries, so useful for
making international comparisons of inflation
See page 117 for data
Measuring Unemployment
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Unemployment rate = % of the labour force
who are out of work, i.e. % who are jobless,
available to work & are actively seeking
employment
Unemployment rate = the unemployed x 100%
labour force
Preferred UK measure
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Labour Force Survey - based on International
Labour Organisation’s definition of
unemployment
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Someone is unemployed if they are ‘out of work,
want a job, have actively sought work in the last
four weeks and are available to start work in the
next two weeks or are out of work, have found a
job and are waiting to start it in the next two
weeks’
Monthly survey
Which is the best measure?
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LFS measure thought to capture more of those
unemployed as may be seeking work but not
entitled to claim unemployment-related benefits
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i.e. if partner is working or claiming
Under 18
Used by the Statistical Office of the EU & the
Organisation for Economic Cooperation &
Development and most cuontries – can make
international comparisons
LFS more expensive to collect and may be subject
to sampling errors
The business cycle
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A phenomenon whereby GDP fluctuates
around its underlying trend, following a
regular pattern
Leading indicators & lagging indicators –
what are they?
Can we predict the turning
points?
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Leading indicators
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Coincident indicators
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Changes in number of new dwellings
Changes in consumer borrowing
Move in step with business cycle, e.g. real GDP or
volume of retail sales
Lagging indicators
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Unemployment