Transcript File - LPS Business Department

2.1.2 Macroeconomic indicators
Macro comes from the Greek “Makro” which
means large.
Macroeconomics looks at an economy as a whole.
What macroeconomic indicators are frequently
reported on the news?
AS: 3.2.1 T HE MEASUREMENT OF
MACROECONOMIC PERFORMANCE
2.1.2 M ACROECONOMIC

INDICATORS
Data which is commonly used to measure the
performance of an economy, such as: real GDP,
real GDP per capita, Consumer Prices and Retail
Prices Indices (CPI/RPI), measures of
unemployment, productivity and the balance of
payments on current account
K EY
MEASURES OF THE
UK
ECONOMY
The following 4 variables are used to measure national economic
performance:
Economic Growth
1.

Measured
by Gross Domestic Product (GDP) or GDP per capita
Unemployment
2.

Usually measured as ‘level’ or ‘rate’
Inflation
3.

Measured by the Consumer Price Index (CPI) and the Retail Price
Index (RPI)
Balance of Payments
4.

Typically measured in terms of the value of the net exports
T HE E CONOMIC C YCLE

Ever since economic data has been captured
and measured, it has been noted that income
and employment tend to fluctuate over time

The key questions to consider are:

What causes this?

What are the impacts of such variation?

What can be done about it? i.e. policy
T HE E CONOMIC C YCLE D IAGRAM
The Economic
Cycle is a simple
model that
demonstrates the
cyclical pattern of
GDP as it
fluctuates around
the trend growth
rate.
Real
GDP
Trend Growth Rate
Boom
Downturn
Recovery
Economic
Cycle
Recession
Time
= Positive Output Gap
= Negative Output Gap
In pairs take it in turns to
explain each of the terms
shown on this slide.
T HE D IAGRAM E XPLAINED
The Government’s
objective in terms of
the economic cycle is
to maximise the longrun trend rate of
growth, whilst
ensuring that shortrun fluctuations are
minimised.

Real GDP is the value
of the output in an
economy adjusted for
inflation.

Real GDP per capita
divides real GDP by
the number of people
in a country
Trend Rate of Growth

Also known as the underlying rate of growth, it is the rate of
growth that can be sustained without generating any
inflationary pressure

It is determined by the rate of growth of productive potential as
determined by its factors of production i.e. land, labour, capital,
entrepreneurship
Positive Output Gap


This occurs when the economy temporarily grows faster than
the trend rate operating in the short run beyond its full capacity
Negative Output Gap

This occurs when aggregate demand is growing at a slower rate,
or falling in relation to its productive potential

This was most recently observed in the UK during the recession
of 2008-2012
GDP I NDEX
Comment on the
trends by sector
from 2010 to 2013.
C ONSUMER P RICE I NDEX (CPI) AND
R ETAIL P RICE I NDEX



Definition

“The rate of change of the average price level over time”

Or “A sustained increase in the general price level”
Target & Measurement

Target = 2% +/- 1%

The CPI & RPI
Causes of inflation

Demand-Pull

Cost-Push
The CPI and RPI are
measurements of a ‘basket’
of goods and services
representative of what
people buy in the UK. The
main difference is that CPI
excludes housing costs
which can have a significant
affect on inflation e.g.
housing boom.
CPI/RPI I NDEX
Comment on the
trends in UK inflation
over time.
Use the data
provided to explain
the difference
between CPI and RPI.
T HE B ASKET
OF
G OODS
AND
S ERVICES

The ‘shopping basket’ of items used in compiling the various
measures of consumer price inflation are reviewed each year

Some items are taken out of the basket and some are brought in to
make sure the measures are up to date and representative of
consumer spending patterns

A convenient way of thinking about this is to imagine a very large
‘shopping basket’ containing those goods and services bought by
households. As the prices of the various items in the basket change
over time, so does the total cost of the basket

Currently, around 180,000 separate price quotations are used every
month in compiling the indices, covering around 700
representative consumer goods and services. These prices are
collected in around 150 areas throughout the UK
T HE B ASKET
Each year, items
are added or
removed from
the basket of
goods to reflect
changes in
spending
behaviour.
This table
shows some of
the changes in
2014.
In addition,
some items
may change in
“weight” .
OF
Added
G OODS
AND
S ERVICES
Removed
Flavoured milk
Wallpaper paste
Fresh fruit snacking pots
Hardwood flooring
Honey
Gardeners’ fees
Mixer drinks
Drive-through car wash
DVD rental/on-demand services
DVD recorders
Fashion necklaces
After school club charges
Points for discussion:
How representative do you think the basket of goods and services is?
Is it a good and accurate measure of consumer spending and
behaviour?
U NEMPLOYMENT
Definition
“The number of people looking for work but who cannot find a job at a point in
time.”
Members of the labour force who want to work, are able to work, but are
unable to find a job.
Measurement
Labour Force Survey and the Claimant Count
There is a difference between “level” and “rate” e.g. millions v %
Types of unemployment
Cyclical, Structural, Frictional, Seasonal, Technological, Regional
Causes of unemployment
Lack of aggregate demand, labour immobility, unemployment trap where welfare
benefits make it unviable to go to work
Possible remedies for unemployment
Expansionary fiscal and monetary policies, supply side polices
C AUSES
OF
U NEMPLOYMENT (1)
There are a number of causes of unemployment, but they can
usually be categorised into one of the following:
 Aggregate Demand
Known as demand deficient or cyclical unemployment and
usually occurs during a recessionary period in an economy
 The demand for labour is derived, so a lack of demand for
goods and services leads to a lack of demand for labour to
produce those goods and services


Structural


Occurs when there is a difference between the
characteristics workers have e.g. skills and geographical
mobility, and the characteristics required by employers
Frictional


The period of time when a worker is moving between jobs
It is usually considered to be short term in nature
C AUSES


Unemployment that occurs through seasonal
fluctuations in demand throughout the year
Unemployment figures are usually adjusted to take
account of this
Technological


U NEMPLOYMENT (2)
Seasonal


OF
Created through the increasing degree of automation in
the production process
Regional

Typically linked to structural unemployment, a situation
where a town or region experiences a downturn; for
example through the declining importance of an industry
which is heavily favoured in that area
C ONSEQUENCES
OF
U NEMPLOYMENT
There are a number of consequences of unemployment for
both individuals and the economy.
The
consequences
of
unemployment
are
undoubtedly
serious.
Discuss what
you consider to
be the most
significant
problem.
Individuals
The Economy
Lower living standards
Government finances
“De-skilling”
Lost output
Health implications
(stress, life expectancy)
Lower international
competitiveness
Social issues
(divorce, crime, social dislocation)
Rising inequality
Unemployment trap
Loss of resources invested in
training
Longer term employability
Lower consumer spending
U NEMPLOYMENT I NDEX
BBC Economy tracker: Unemployment
Comment on the trends in the rate of unemployment in the UK
With reference to the graph above and the two links comment
on the trends in Unemployment in the UK.
U NEMPLOYMENT I NDEX
Unemployment
in Spain.

Comment on the level of unemployment in the UK relative to other EU
member states.
P RODUCTIVITY

The problem
that is UK
productivity

Economists measure the productivity of all factors of
production
Productivity can take different forms:

Labour productivity is output per worker:

Total output/no. of workers

Capital productivity is output per unit of capital e.g.
machine

Factor productivity is the average output of all factors
of production
T HE B ALANCE

OF
PAYMENTS
The Current Account

Primarily records the trade in goods i.e. visibles and services i.e. invisibles

Also includes net income flows from interest, profit and dividends from UK assets
owned overseas. It therefore includes payments made overseas from assets based in
the UK, but owned by foreign MNCs

Includes overseas aid payments and payments to the European Union
The Balance of Payments also includes:

The Capital Account

Primarily records international flows of capital such as inter-country loans or
government investments overseas

The Financial Account

Primarily records net Foreign Direct Investment (FDI)

Also includes government owned assets such as gold, currency reserves and private
assets held abroad It will also include short-term capital flows, such as speculative
movements on currency or share investments e.g. hot money
You do not need to look at these accounts in depth.
B ALANCE
OF
PAYMENTS
Comment on the trends in the UK’s
balance of payments over time.