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Unit 6 Economic Indicators
Terms in this set (45)
Consumer Price Index
a measure of the average prices of selected goods and services bought by a typical consumer in a country from a sample of different retail outlets over a year
What are the three main uses of the consumer price index?
1. As a macro-economic indicator : of the rate of price inflation in an economy and change in the cost of living affecting consumers
2. As a price deflector: to 'deflate' the value of wages and incomes by the impact of price inflation to calculate the change in their purchasing power.
3. To index-link income payments: so their purchasing power increases at the same rate as inflation. This is called indexation.
a persistent or sustained rise in the general level of prices over a period of time
target rate for inflation is between 1-3% in NZ
inflation at this level will not distort decision making, erode international competitiveness or force IR up too high
What is the base year?
The first year of measurement for the CPI and it equals to 100.
What are the main causes of price inflation?
1. Demand-pull inflation: caused by total demand rising faster than the total output of goods and services, causing market prices to rise
2. Cost-push inflation: caused by an increase in the cost of producing goods and services
3. Imported inflation: results from rising prices of goods and services imported from overseas. This can be due to an increase in the costs of overseas producers and/or a fall in the exchange rate of the currency of the importing country.
What are the consequences of inflation?
- inflation reduces the purchasing power or 'real value' of money
- inflation reduces the real value of savings
-inflation reduces the real value of loans
- inflation may help boost tax revenues
- inflation increases government spending
- inflation can reduce company profits
- inflation may cause unemployment
A continuous decline in the general level of prices in an economy.
What causes deflation?
Falling product prices become widespread and prolonged due to a slump in consumer demand.
What are the consequences of deflation?
-consumers delay spending as they wait for prices to fall further
- unsold goods accumulate so firms cut their prices and this reduces their profits
- firms cut their production and reduce he size of their work forces
- household incomes fall as unemployment rises. => reduces consumer demand further
- the real value of debts held by people and firms rises as prices fall
- firms stop investing in new plant and machinery => reduces economic growth
- governments must borrow more money as tax revenues fall
-eventually, demand, output, the demand for labor and incomes continue to fall
- firms may go out of business => they are unable to increase sales and profits not matter how much they cut their prices because consumers simply delay their purchases further
What is rising
show for the economy?
a) Sign that economic conditions are deteriorating
b) Economy is healthy and growing
How do you calculate the participation rate?
number who are prepared to work / number within working age range
Where someone willing and able to work doesn't have a job.
How is structural unemployment caused?
By changes in the industrial structural of an economy.
When is regional unemployment caused?
If most firms in the industry were located in one particular area.
What is technological unemployment?
Technological advancements cause unemployment in some industries.
What does frictional unemployment refer to?
To short-lived unemployment that occurs when people leave jobs they dislike, move to higher paid jobs, move home or are made redundant.
Why does seasonal unemployment occur?
Occurs because consumer demand for some goods and services changes with seasons.
Consequences for high unemployment in a region
Lower living standards, less demand, higher crime, lower productivity
How unemployment can be a symptom and cause of recession
Lower disposable incomes, less spending, more welfare reliance
What can sustained economic growth bring?
Widespread benefits by
-increasing the availability of goods and services -creating new employment and business opportunities
-increasing tax revenues that can be invested by governments in better roads
-schools and health care
-generally improving living standards and economic welfare
the ripple of ongoing spending that results from an initial increase in spending in an economy
market value of all final foods and services produced in a country in a year
GDP per head/capita
Real GDP vs Nominal GDP
Nominal GDP is a measure of total value of all goods and services produced in an economy while Real GDP is a measure of total output assuming that the prices are the same.
Nominal GDP can be misleading if output is only growing because of inflation (leaving public no better off). Real GDP accounts for the inflation making it more accurate
Three methods of calculating GDP:
1. Output Method
2. Income Method
3. Expenditure Method
GDP (Output Method)
Adding the final outputs produced by a firm in every industry.
GDP (The Expenditure Method)
Estimate the amount spent on four categories: consumer goods and services, business goods and services, government goods and services, and net exports (exports-imports). After finding the value of those four categories, economists add them together.
GDP (The income Method)
Adding up all the incomes
the amount of goods and services in the economy that will be purchased at all price levels
the total amount of goods and services in the economy available at all possible price levels
Equation for GDP and what each means
C=consumption: spending by a household on goods/services
I=investment: spending by businesses on goods/services (includes construction of new houses as well)
G=government: spending by all levels of the gov't. (does NOT include welfare, SS, etc.)
X-M=exports-imports: spending by people of other countries on US products (minus) spending of US people on other country's products
Limitations of GDP
1) Underground Economy (income not reported to gov't)
2) Negative Externalities
An increase in the Real GDP, hence an increase in the total output of a country
Measurement of Economic growth
Growth < 3% means unemployment will rise
Growth > 4% results in inflation
Reasons for economic growth:
1. More resources discovered
2. Investment in new capital and infrastructure
3. Technological improvements
4. Increasing workforce and human resources
5. Reallocating resources to make production more efficient
The pattern of recurring ups and downs observed in Real GDP growth over time
Economic activity expanding rapidly
- Firms enjoy increased sales and profits
- New businesses formed
- Output, income and employment all increase
Economic Peak (Boom)
Aggregate demand, sales and profits hit peak. There may be demand pull inflation and prices rise extremely high
Slowdown in economic activity
- Profits and sales fall
- Unemployment rises
Consumer confidence recovers as sales, profits and production starts to increase again
Benefits of economic growth:
1. More goods and services produced
2. Increased employment
3. Increase sale and profits
4. Low and stable inflation
5. Increasing tax revenues
6. Improved standard of living
Problems of economic growth:
1. Technological progress may replace human workers
2. Resource depletion for increased production
3. Environmental pollution
Achieving economic growth however minimising depletion of natural resources and reducing waste by changing production and consumption methods
An economic indicator which measures how healthy the economy is by adding up the trade balance (exports vs imports), net income from abroad and current transfers
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