Transcript The Performance of the UK Economy

The Performance of
the UK Economy
Judge the economy against the
objectives set:
4 key macroeconomic objectives
Macroeconomic objectives




Price stability
Full employment or at least low
unemployment
Balance of payments
Economic growth
Economic growth

The only measure of living standards?




Environmental considerations
Income redistribution
Correcting market failure
Productivity (measure of the efficiency with which
factors of production are being utilised in the
economy)
Inflation

How do you measure it?

Retail price index (RPI)






RPIX target of 2.5%
RPI measures average price of typical basket of goods
bought by the average household
RPIX excludes mortgage payments
RPIY excludes mortgage payments & indirect tax
RPIX & RPIY = ‘underlying rate of inflation’ – more reliable
measure of trends
RPI = ‘headline rate of inflation’
Inflation

Consumer price index (CPI)



Target of 2.0%
CPI is a more recent measure of the price level &
inflation – developed by the EU to be used across
all countries in the EU
CPI excludes council tax, mortgage interest
payments, house depreciation, buildings
insurance, estate agents’ & conveyancing fees
Why target 2.0%



Helps to foster long-run sustainable growth
Low & predictable inflation means firms will be more
confident in forming expectations about the future &
prepared to undertake investment. This will expand
productive capacity & shift AS curve to the right.
Prices need to act as signals to firms & guide
resource allocation. Relative prices can adjust more
easily when there is a little bit of inflation
Unemployment




ILO unemployment rate measures the % of the
workforce who are without jobs, but are available for
work, willing to work & looking for work
Claimant count
Can never be zero – how do you put a precise
number on the irreducible minimum employed
May be desirable to have some unemployment
present – reflection of economy adjusting to
changing patterns of consumer demand
Balance of Payments




Set of accounts that monitors the transactions that
take place between UK residents and the rest of the
world
Current account – identifies transactions in goods &
services
Financial account – identifies transactions in
financial assets (eg investment flows & central
government transactions in foreign exchange
reserves)
Capital account – capital transfers (relatively small –
largest item is associated with migrants)
Economic growth





An increase in the productive capacity of the
economy
Based on changes in real GDP over time
As GDP is subject to fluctuations of the business
cycle, underlying trend growth needs to be identified
Long-run average growth rate of 2.4%
National income measured by 3 methods:



Expenditure
Output
Income
GDP & variants



GDP includes indirect taxes & value of
imports and exports
Gross value added (GVA) =
GDP – indirect taxes - subsidies on goods
(basic price adjustment)
Gross national income (GNP) = GDP +
income earned abroad on investments &
other assets owned overseas – income paid
to foreigners on their UK investments
Accuracy of national income
statistics




Statistical inaccuracies
Hidden economy
Home produced services
Public sector – how do you value much of the
output of the public sector?
Other measures


Quality of life – UK government produces an annual
index of 14 ‘quality of life’ measures, e.g. traffic
levels, wild bird populations, gas emissions,
economic growth, crime levels
Human Development Index (HDI) reflects key
aspects of the quality of life: resources, knowledge
& longevity. Varies between 0 and 1 (higher value =
higher level of human development)


HDI for Japan = 0.94
HDI for Ethiopia = 0.252
Comparing national income over
time








Prices – consider real and not nominal changes in
income
Accuracy & presentation of statistics
Changes in population (per capita)
Quality of goods & services
Defence & related expenditures
Consumption and investment
Externalities
Income distribution
Comparing national income
between countries


Purchasing power parities
National wealth – human & non-human
wealth