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Terms in this set (31)
Price stability, full employment and sustainable economic growth
Price Stability and objective
Occurs when inflation rates are low. Target rate is at 2-3%.
Unemployment due to the lack of skills to meet the changing demands of employers in an economy.
Problems with GDP as a measure of economic growth
GDP does not consider: 1. Effects of price changes. 2. Effects of changes in population. 3.Problems associated with GDP as a measure of actual output. 4.Definitional issues about growth and economic welfare.
Effects of Price Changes on Nominal GDP
Nominal GDP does not consider growth as a result of price changes. Nominal GDp values outputs in current prices. In Zimbabwe, nominal GDP rose by millions as a result of high inflation. Economic growth should use real GDP.
Value of GDP that has been adjusted with inflation.
Effect of Population
GDP does not consider the effect of changes in population. Any increase in GDP must be shared amongst more people. Economic growth should be measured per capital.
Real GDP per Capita Formula
Problems associated with GDP as a reflection of Living Standards and Welfare
WINGOW - 1. Does not consider how benefits of economic growth such as greater WEALTH is distributed throughout the community. 2.Understates IMPROVEMENTS to working conditions such as maternity leave and regular breaks. 3. Does not account for NON-MARKET production such as housework, charity work and volunteer work is understated and not taken into account. 4. Does not consider improvements to the quality of GOODS and Services. 5. Does not measure changes to OVERSEAS relationships. 6. Only measures material welfare and does not measure NON-MATERIAL WELFARE such as life expectancy, educational and health services.
Definitional Issues about Growth and Welfare
Other measures of growth are sometimes applied such as socioeconomic and development indicators which measure changing welfare over the long term such as the TQLI and Genuine Progress Indicator.
Total Quality of Life Index measures the ability for the nation to meet the basic needs of its citizens.
Genuine Progress Indicator
Suggest gains in material welfare are usually offsets of other types of welfare.
Problem with GDP as a measure of actual output
Misses out, understates and overstates some economic activity.
Economic Activity not measured by GDP
Informal Markets - such as markets that deal in only cash transactions are not recorded in the GDP figure.
Non-Marketed Output - the value of output that people do themselves that could be done as a paid service are not recorded in the GDP figure. E.g housework, gardening, repairs
Charity Work and Volunteering - Not measured.
Economic activity overstated
Negative Externalities - GDP does not consider the costof goods and services or production that produce negative externalities to the community. E.g Pollution
Defensive Expenditure - GDP does not consider output needed to fix problems caused by the production process. E.g Health costs of pollutions, work related health care.
'Bads' - Goods that provide little benefit E.g Weapons of mass destruction.
Missed out in GDP - where activity is not recorded and payments made in cash (E.g local sales via gumtree)
Ways of Population Increases and Effects
Migration - Immediate demand for g&s and labour supply, Assuming the majority of migrants are of working age
Natural Increase - Gradual increase on labour supply and immediate demand for G&S - Only increases when children are able to enter the workforce
Stock of knowledge and skills that people develop through experience and education.
Types of Human Capital Provisions
Provision of Basic Building Blocks, Provision of Education, Provision of Ongoing Training
Human Capital (People, How They Invest, What They Invest, Investment Returns)
Individuals Through enrolling and purchasing education and training programs Time, Effort, Money, Lost Expect a higher income
Firms Hiring more skilled workers or training current workers,Money, More productive workers
Government Subsidies on training programs and education.Such as HECS for higher education",Money ,"A more adaptable, educated workforce.
(assists in structural unemployment)
Ability to understand more complex issues and contribute to public life"
new discoveries and new techniques and the application of these in the production process. Results in higher level of output per worker (better utilisation of resources)
Improvements in Labour
Generally occur as a result of education, training, the incentive for competition, better organisation of production and more efficient allocation of resources between industries.
Benefits of Economic Growth
IMPROVEMENTS to working conditions
Increases in DISPOSABLE INCOME
Increases to the quality of GOODS AND SERVICES
reduced ENVIRONMENTAL FOOTPRINT
Higher quality HEALTH AND EDUCATION
Costs of Economic Growths
I RISED - INFLATION risk, RESOURCE depletion, INEQUALITY of wealth, STRUCTURAL unemployment and change, extra production of negative EXTERNALITIES, increased consumption of DE-MERIT goods
Greater employment opportunities
Increasing output means increasing factor of resource inputs including labour
Creates further growth
Growth raises business confidence or expectations and is likely to contribute to new investment spending.
Structural change and structural unemployment
Growth in one area will cause a decline in another area, creating structural unemployment.
If aggregate demand exceeds aggregate supply, the economy will experience capacity constraints, such as shortage of skilled labour or transport congestion, lastly prices and wages will rise
Extra output can lead to unsustainable resource depletion and environmental demand. Additional output also carries negative externalities including more pollution and landfill.
GDP is the total market value of all final goods and services produced in a country duirng a period of time.
Real GDP per capita
The average value of real output per person in an economy.
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