UNIT 6: Economic indicators

 Describe how the retail/consumer price index is calculated CALCULATION OF PRICE INDEX
 Describe the causes of inflation and deflation
 Describe the consequences of inflation and deflation 1. Select a base year and give index as 100
 Describe the changing patterns of employment 2. Conduct a family expenditure survey household expenditure, and select a
 Describe the changing levels of employment basket of goods in which most percentage of income is spent to
 Discuss the causes of unemployment 3. Give weights according to the importance given to the product
 Discuss the consequences of unemployment 4. Finding price changes from the information about prices from government
officials
 Define Gross Domestic Product (GDP)
5. Calculate the weighted index by multiplying weights with new price index for
 Describe and have a general understanding of the causes of economic growth
each category by using the formula
 Describe and have a general understanding of the consequences of economic
current year price
growth × 100 ×weight
base year price
 Define the term recession
6. Calculate the general price level , that is the difference between the current
 Describe simple measures and indicators of comparative living standards,
year price index and base year price index (that is 100)
such as: • GDP per head • Human Development Index (HDI)
 Evaluate simple measures and indicators of competitive living standards, Example
such as: • GDP per head • Human Development Index (HDI)
commodity Base year (2010) Current year (2011)

INFLATION Weight Price Weighted Price Weighted index

 Continuous increase in the general price level which lead to a fall in money value index
and purchasing power.
Sugar 1 4 100*1 = 100 8 8/4*100*1=200
DEFLATION
 Continuous fall in the general price level Soap 2 5 100*2=200 5 5/5*100*2 = 200

PRICE INDICES (or indexes) Onion 3 10 100*3=300 9 9/10*100*3= 270

 It shows the change in general price level in percentage terms over time. Rice 4 5 100*4 = 400 8 8/5*100*4 = 640
 The two main price indices are retail prices index (RPI) and consumer price index
(CPI) Total 10 1000 1310

COST OF LIVING Average / 1000/10 = 1310 / 10 =

The cost of a representative basket of goods and services price index 100 131
The positive percentage of price index indicates that the price level is
increasing by the percentage compared to previous year price level even if

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 the percentage is lower price level.
If price index percentage is negative, then the general price level is falling  However, if the country has no spare capacity and has shortage of
compared to the previous year. resources, then aggregate supply may not be increased and inflation
occurs
TYPES OF INFLATION

1) Creeping inflation
 A very small percentage increase in the general price level usually between 0
to 6%
 This is good to the economy because this arises from economic growth
 This type of inflation encourages producers, leading to better allocation of
resources and speeds up economic growth.
2) Hyper / Galloping inflation
 It is very high increase in general price level usually above 100% leading to a
huge fall in money value.
 It is dangerous to the economy, as people lose confidence since money fails
to perform its functions store of value, stability.
 It rings uncertainty and have difficulty in making repayments
 It can be reduced by eliminating inflated currency and creating new currency
after fixing exchange rate
3) Surpressed inflation
 Inflation caused when aggregate demand is greater than aggregate supply
 This is controlled by government fixing maximum price control and through
rationing

CAUSES OF INFLATION 2. COST PUSH INFLATION

 Rise in general price level caused by higher cost of production
1. DEMAND PULL INFLATION
 If firms face higher costs, they will usually increase their prices to
 Rise in general price level caused by an excess demand (aggregate demand >
maintain profits
aggregate supply)
 The following can increase costs of production:
 Aggregate demand can increase due to higher consumption, higher
o when wage increases more than labour productivity, this can
investment, higher government expenditure and higher exports
increase labour cost
 If the country can increase aggregate supply to meet increased aggregate
o increase in the cost of raw materials such as oil can increase price
demand, then inflation will not occur.
level
 That is if they can employ unused resources, unemployed workers,
o increase in indirect taxes, removal of subsidy, higher cost of capital
unused machines, they can use it to increase output but no increase in
goods, or advertisement can increase cost of production
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  wage-price spiral: wage increase leading to higher prices, which in turn CONSEQUENCES OF INFLATION
lead to further wage claims and price rises.
HARMFUL (NEGATIVE) EFFECTS / DISADVANTAGES OF INFLATION

 Inflation causes a fall in the value of money and purchasing power. If prices are
rising, each unit of money can buy fewer goods, reducing standard of living.
 Savers are likely to lose as their saved money’s value will be diminished, since the
saved money can now buy less goods compared to before inflation
 Lenders going to lose due to inflation as the money they get from borrowers will
have less value compared to the value of money they lent before inflation.
General
 Workers with weak bargaining power and those with fixed incomes suffer during
price
inflation as their income cannot be increased, and the income they receive has
level
less value and lower purchasing power.
 Inflation can increase cost of production of firms. It can increase labour cost and
raw material cost. This can again increase prices
 Inflation creates uncertainty, lose the confidence of consumers and firms making
it difficult to judge the right price to be paid.
 Inflation loses the consumer and business confidence, making it difficult to plan
ahead as they are uncertain about future prices.
 Firms would be discouraged to invest as they have lost business confidence due
to the loss of money value and its instability. This is harmful for the economy.
National output  Inflation can worsen country’s balance of payment and can lose international
competitiveness. This may result in a fall in exports and a rise in imports leading
3. MONETARY INFLATION to current account deficit.
 Rise in the general price level caused by an excessive growth of the  Inflation can lead to a fall in demand for the country’s product. This may increase
money supply unemployment in the country.
 It is a form of demand pull inflation, in which demand is created by an  If government tax rates are not reduced during inflation, people’s income will be
excessive growth of money supply. gone for tax with lower disposable income.
 If money supply increases, people will spend more, leading to an increase  Cost push inflation can reduce production, outputs and income. This can reduce
in prices. economic growth and lower standard of living.
4. IMPORTED INFLATION  Inflation can also result in unemployment since firms find methods to reduce cost
 The rise in general price level caused by imports from countries that has of production by removing workers to lower labour cost.
higher price level ADVANTAGES OF INFLATION (positive consequences / positive effects)
 For example, if other countries has inflation, importing raw materials from
such countries can increase the prices  Inflation can benefit those workers with stronger bargaining power, as their
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 income increases more than inflation rate. exports and imports is elastic, and if the fall in price level is not offset by a
 Inflation can benefit borrowers, as the money they borrowed before the inflation rise in exchange rate.
have high value compared to the money they pay. (if the interest rate is below  A good deflation can increase output, generate more income and achieve
inflation rate, borrowers pay back less in real terms what they borrowed) economic growth and improved standard of living.
 Demand pull inflation can encourage firms to expand and make entrepreneurs  A good deflation increasing output can also increase employment, and
optimistic about future prices income which will lead to a reduction in poverty
 Inflation reduces real burden of any debt that households and firms have. This  An increase in income and output due to a good deflation can increase
may mean that firms will avoid going bankrupt. government revenue and reduce budget deficit, which can also be used for
providing better health and education
 This is likely to be beneficial as it will means that consumers can enjoy more
goods and services and economy will become more internationally
competitive.
CAUSES (FACTOR AFFECTING) DEFLATION  Both good and bad deflation can increase purchasing power of those whose
 Deflation may result from increase in aggregate supply can be beneficial income remains unchanged.
 The price level may be reduced as a result of advances in technology and HOWEVER
increases in labour productivity. This can reduce average cost and increase
output.  A bad deflation (caused by an decrease in aggregate demand) may cause a rise
 This is likely to be beneficial as it will means that consumers can enjoy more in unemployment and reduce output and income, leading an increase in
goods and services and economy will become more internationally competitive. poverty.
 Price level may reduce if competition between firms increases  A bad deflation can also discourage investment which will reduce productive
capacity and reduce economic growth.
However  Deflation can increase burden of debt, those who took loan will have to pay
 Deflation resulting from decline in aggregate demand is harmful as it lead to back more in real terms. So borrowers will lose but lenders will gain.
economic downturn. POLICIES TO REDUCE INFLATION
 Consumers expecting prices will be lower in the future, so they may postpone 1. To control demand pull inflation
their purchase.
i) Increase interest rate or bank rate: (borrowing decrease and saving increases, so
 With lower demand for their products, firms are likely to reduce their output money supply decreases decreasing aggregate demand and demand pull inflation)
which can reduce economic growth and standard of living ii) Increase Cash Reserve Ratio (CRR) of commercial banks: (this is the amount that
 Also if firm reduces output, workers will also be reduced leading to has to be kept as reserve. Increase in CRR will reduce the bank ability to give loans, so
unemployment, reducing income. This may again reduce aggregate demand money supply reduces, so demand pull inflation can be reduced)
iii) Sell bonds and securities: (when government sell bonds and securities, people buy
CONSEQUENCES OF DEFLATION
them and money goes into the government, reducing the money supply in the economy)
 A good deflation (caused by an increase in aggregate supply) may reduce a iv) Increase income tax (tax on income) and corporation tax (tax on company’s
current account deficit (increase current account surplus) if demand for profits): (people will have less money, so demand will reduce and demand pull inflation)
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 v) Reduce government spending: (demand reduce and income of the people reduce Part time work
reducing demand pull inflation)
vi) Government persuades trade unions or producers not to increase wage rate  People chose to work part time because it may fit in with their children’s school
above productivity of workers hours
vii) Government might also go for legal control of the wages, so wage limit can  It also enable them to look after elderly relatives , or pursue other interests.
reduce demand pull inflation and cost push inflation, since limiting wage can  Some work part time because they are unable to find jobs with full time
reduce labour cost. Employed and self-employed
2. To control cost push inflation
 Some people work for someone else are known as employees are considered as
i) By training and retraining the workers to make them more mobile and also
employed.
more productive, can reduce cost of production and hence inflation.
 The number of self- employed workers are increasing as they work during their
ii) By providing subsidies and grants to encourage investments and to reduce cost
own time to earn income
of production , can reduce cost push inflation
iii) By promoting horizontal integration, can increase economies of scale and Private and public sector employment
reduce average cost of production reducing cost put inflation. The proportion of labour force working in private sector are increasing these days.
iv) By improving health care can make worker more healthy and productive,
 The main reason for the decrease in the population working in public sector is
increasing production and reduce cost of production.
due to privatisation. Number of countries are selling state owned enterprises to
v) Removing indirect and corporation tax can reduce firms cost of production and
private sector.
encourage firms to produce more and expand the business, this can further
 However workers in the public sector often have more job security and high non-
reduce the cost and inflation.
wage benefits
3. PRICE CONTROL
The government sometimes directly control the prices by fixing maximum price CHANGES IN EMPLOYEMNT AND UNEMPLOYMENT
control, to reduce inflation.
 A rise in employment may reduce unemployment if it is the unemployed who fill
UNEMPLOYMENT at least some of the extra jobs
 Both employment and unemployment can increase if the labour force grows
 A situation where people are actively searching for work are unable to find jobs
faster than number of jobs available.
at the current wage rate overtime
 It is also to fall unemployment without an increase in employment because
FULL EMPLOYMENT finding job is not the only reason for not being employed. There could be other
reasons like
A situation where demand for labours is equal to supply of labours. The number of
o Some unemployed people may reach retirement age
job vacancies are equal to the number of people out of work.
o Some may go into full time education
o Some may emigrate
o Some may just stop searching for work
CHANGING PATTERNS OF EMPLOYMENT

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CALCULATION export market will be lost and unemployment would arise in
exporting industries
registerred Unemployment
Unemployment rate: × 100 b. A substitute found for the product, can decline the demand for the
labour force
product, so labour producing the product will lose jobs
Employment rate is the percentage of working age population in employment. c. Capital being substituted for labour
d. Regional unemployment occurs when an unemployment in cone
Factors affecting Employment rate area of the country due to particular problems.
 Higher wages will encourage more people to seek work and stay in the e. Technological unemployment refers to unemployment that occurs
labour force, past the usual retirement age. when workers are removed as a result of an improvement in
 Social attitudes for women to work, if acceptable then there will be a larger technology
labour force and greater employment rate  This is more serious than frictional because it stays longer periods and
 Social attitudes and provision for the disabled work can increase the affect more workers
willingness to accept disabled people working and easier for disabled people 3. Unemployment occurred due to a reduction of aggregate demand is known as
to work demand deficient or cyclical unemployment. If economy goes into recession,
 High level of demand in the economy means there will be demand for demand for labour is likely to fall and unemployment occurs.
labours, so high employment rate MEASURES TO REDUCE UNEMPLOYMENT
 If the gap between wages and benefit increases, people will be encouraged
to work and earn, increasing employment rate.  To reduce frictional unemployment, workers can be made more mobile
geographically and occupationally, that is providing education and training, so
CAUSES (Factors affecting) OF UNEMPLOYMENT that they can find jobs easily
1. Unemployment that occurs when people are moving from one job to another to  Government can increase incentive to work by cutting income tax and benefits
get a higher pay. These are known as frictional unemployment. Some types of so that workers will like to work. This can reduce frictional unemployment.
frictional unemployment are as follows  Government can also establish job centres and publishes job opportunities
a. Search unemployment occurs when workers do not accept the first job regularly so that people will get information about jobs availability
offered and spend time looking for the “acceptable job”  To reduce structural unemployment includes measures to increase labour
b. Casual unemployment occurs when people are out of work between period mobility like education and training, accommodation and infrastructure, so that
of employment. Eg: actors, migrant farm workers people will like to move
c. Seasonal unemployment occurs when workers get unemployed seasonally o Increase the occupational mobility of labour through training and retraining..
due to reduction in demand for the product in a particular time period. Eg: o Increase geographical mobility of labour by providing good accommodation,
working in building and tourism industry education, hardship allowance… etc
2. Structural Unemployment caused by the decline of industries and particular  Also government can encourage firms to move to areas of high unemployment
occupations, arising from long term changes in demand and supply. This happens or assist declining industries by giving special grant or subsidy and avoid regional
when unemployment
a. Another country become better at producing the product, so the  The government can provide initial capital to get self-employed to those who
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 get unemployed during off-seasons, this can avoid seasonal unemployment.  Increase government spending
 To reduce cyclical unemployment, government can reduce income tax, interest
CONSEQUENCES (EFFECTS) OF UNEMPLOYMENT
rate to increase aggregate demand. Government can also increase its
expenditure and money supply within the economy to increase aggregate ADVANTAGES:
demand.
 The existence of unemployed workers makes it easier for firms to expand to recruit
 To reduce cyclical unemployment, government have to seek methods to
more workers.
increase aggregate supply by giving subsidies, education and training.
 It can also keep down inflation by lowering the wage rises.
 Reduce exchange rate or implement protectionism in control imports in order to  Unemployment benefit may be more attractive than the wage from the employment
increase production in the home markets, so jobs will be created or not lost.
DISAVANTAGES TO THE UNEMPLOYED
When economy goes into a slump all the economic activities will fall causing mass
unemployment which is known as cyclical unemployment. (Economy goes to  Most unemployed suffer a fall in income, some countries do not give
unemployment benefit. So they may be in poverty with very low standard of
recession and then to a slump)
living
 The unemployment benefit paid may be much lower than the income earned
National from jobs.
output Boom /
peak  Being unemployed can lose the self-worth and may not be recognised by people
 Lower income and stress of being unemployed can result in a decline in mental
recovery and physical health of the unemployed and may lead to marriage break-ups
recession  Lowe income may have bad effects on education and health of children of
Slump unemployed, which lead to them being in poverty
 Unemployed may not be able to afford school education of their children, past
Time the school leaving age.
Boom: a period where all economic activities are at highest  Unemployed will find it difficult to find new job as they have no training in new
Recession: a period where the economic activities start decreasing methods and technological advancements. This can lose the work habit and self-
Slump: a period where all economic activities are at lowest confidence.
Recovery: a period when government adopt measures to increase the economic
activities
Employment strategies

 Provide training and retraining

DISADVANTAGES TO THE ECONOMY
 Establish job centres
 Develop declining industries and regions  Having unemployed workers means economy is not using all of its resources, so
 Reduce income tax to encourage existing workers production will be lower than the capacity. This increase opportunity cost.
 Establish a minimum wage to encourage new workers  It leads to loss of skill of labour, and the countries human resources are wasted (not
 Give production subsidies to producers to encourage taking new workers used)
 Reduce interest rate to encourage borrowing and investment  It increases the government spending on unemployed benefits. Also expenditure on
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 health care would be high since unemployed might be in poverty and in poor health. terms of prices operative at the time. It has not been adjusted for inflation.
 It increases social cost and crimes to gain higher income. If crimes increases,
government has to spend to tackle the problems and ensure security of the citizen.  For this reason, nominal GDP figures may give a misleading impression of
 The money spent on unemployment benefits could have been used for higher what is happening to the output of a country.
education or health or for the development of the country.  For instance, if prices rise by 20% in a year, there will be a 20% rise in nominal
 Money spent treating the depression of the unemployed can be used to treat GDP even if output does not change.
people with cancer.
REAL GDP: to get the real picture of a country output and assess its economic
 It reduces the government revenue from indirect tax due to fall in expenditure.
growth, economists adjust nominal GDP by taking out the effects of inflation, which is
unemployment can reduce income and profits of the firms reducing the tax revenue
called real GDP.
from income tax and corporation tax
 Unemployment reducers aggregate demand, which reduces the national output and  They do this by multiplying nominal GDP with the price index in the base year,
income which hinders economic growth and reduce standard of living divided by the price index in the current year. This gives a figure for GDP at
 It reduces the investment level of the country, as the income of the people constant prices referred to as real GDP. A rise in real GDP of 5% means that
decreases the aggregate demand and supply decreases the country’s output increased by 5%.
ADVANTAGES OF LOWER UNEMPLOYMENT (high employment) Real GDP per capita: it is also knows real GDP per head. It is calculated to the real
 It reduces the government spending on unemployment benefits standard of living of the people. The impact of an increase in real GDP to people will
 It increases the government revenue from income tax depend on the state of population. Therefore, it is calculated by dividing population
 It reduces the social cost and crimes since people are involved in works from the value of real GDP.
 It increases economic output and achieve economic growth
CRITICISM OF USING GDP AS AN ECONOMIC INDICATOR
 It increases the income of the people and improve their living standards
One difficulty is that some economic activities are simply not recorded in GDP
GROSS DOMESTIC PRODUCT (GDP)
calculations. For instance, there are many roadside businesses selling farm products
It refers to the value of total output of goods and services produced by the factors where tax is not declared, and not recorded in GDP.
of production located in a particular country. (total domestically produced outputs)
 GDP only measures total value of goods, and it measures an average. The
 It does not take into account the ownership of resources. Some of resources might be
increase in income may not benefit all individuals. Hence it does not take into
owned by a foreigner and the rest by domestic firms.
 GDP per capita: is measure is of domestic output (GDP) divided by total population
account inequality in society.
 Real GDP: is the value of total domestic output adjusted to inflation. It is also known as  The calculations do not take account the harmful effects of production such as
the purchasing power of GDP. pollution and waste.
 Real GDP per capita: is the measure of purchasing power of GDP per head.  In the GDP figure the production of tobacco is included, which is a harmful good
that can reduce people’s health reducing their life expectancy.
NOMINAL GDP AND REAL GDP
 The GDP figure may include the increase in police services due to an increase in
Nominal GDP: when govts calculate GDP, they first measure it in terms of nominal crime rates, which is not an improvement in living standards
GDP (also called money GDP, or GDP at current prices). Nominal GDP is valued in  GDP is usually calculated within a country using a currency of that country. So

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 when this value is expressed against US dollar, the value may be very less due  Subtract the value of tax
the rate of exchange.  Add the value of subsidies
 The quality of life will improve with the combination of various factors including
NPIA should be added to GDP to arrive at GNP. Depreciation of country’s stock of
being healthy, being educated, being free from stress- all factors that are not
capital should be reduced from GNP to give NNP / national income
measured by simply GDP calculations
 Some productions which are undeclared economic activity would not be PER CAPITA INCOME (PCI)
recorded in the GDP, hence it may be understated
 It refers to the average national income. PCI = Total National Income divided by
 Even if the output rises, but the working condition falls, number of working hour
population.
increases, pollution may increase reducing people’s living standards.
 PCI indicates the country’s general prosperity.
Methods of Measuring National Income  The Per capita income expressed in a common currency is the most commonly
1) The Value Added Method / Output Method used indicator in comparing the living standards of different countries.
It measures he total value added by each economic activity in the production of
The following are some problems associated with measuring Per Capita Income. PCI
country’s annual output of goods and services.
is average figure. It does not tell anything about:
The sum of value added at each stage of production is called GDP.
On to it is added the NPIA (including net profits, rent, dividends, etc) to arrive at GNP.  The equality in the distribution of income and wealth
Depreciation of country’s stock of capital is deducted from GNP to give NNP / national  The types of goods and services produced by the factors of production
income  The social costs (like pollution) incurred due to economic activities

2) The Income Method Circular flow of income of an open economy

It measures the total incomes (wage and salaries, rent, interests, profits, etc)
The following diagram shows circular flow of income between households, firms,
earned by the factors of production used in the production of country’s annual
governments and foreign trade sector
output of goods and services.
But it does not include the transfer payments such as pensions and social security
benefits.
The sum of factor incomes is GDP. Onto it is added the NPIA to arrive at GNP.
Depreciation of country’s stock of capital is deducted to give NNP / national income.

3) The Expenditure Method

It measures the total expenditure on the consumption of goods and services.
We spend on imports ad earn from exports. Similarly, tax raise the value of
expenditure and subsidies reduce the value of expenditure.
Therefore, to reach a correct value measure of GDP;
 Subtract the value of imports
 Add the value of exports

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 production in an economy.

1. An economy not only consists of households and firms, but also government.
2. Countries also take part in trade with other countries
3. Firms often invest in the production of capital goods This is shown in the diagram below.
4. Households do not always spend all their incomes, but also saves a part of it. ACTUAL ECONOMIC GROWTH (short-run economic growth)
Injections can increase aggregate demand
The inflow of incomes into the economy is known as injections. They are
 Short run economic growth occurs when existing unused
a) Investment (I): investments of firms in the production of capital goods is an inflow. resources becomes active.
b) Government Spending (G): Government is the major buyer and the employer in the  This will be shown as a movement from any point inside
economy. It spends on goods and services and salaries and wages. These spending of
the curve up to the curve.
government is an injection to the circular flow
c) Exports (X): exports of goods and services receive foreign currency into the economy ,
hence is an injection to the circular flow of income.

Leakages can reduce aggregate demand

The outflow of incomes from the circular flow of income (income withdrawn from the
economy) is known as leakages. Leakages take the form of; POTENTIAL ECONOMIC GROWTH (long-run economic growth)
a) Savings (S): it is a part of income which is kept aside for future use. It is a leakage as it  Long run economic growth occurs when newly found
does not come into the circular flow of income in the form of household spending. resources increases the production capacity of the
b) Taxes (T): taxes levied on income and spending is a leakage from CFI. country
c) Imports (I): export of goods and services is followed by an outflow of foreign currency.  This be shown as a shift of PPC to the right (forward shift)
Therefore it is a leakage.  Reasons for this includes improved technology
 In contrast if resources of a country decline (eg: earth
ECONOMIC GROWTH quake), PPC will move to the left (backward shift)
 Economic growth means an increase in Real GDP. There is an increase in
national output and national income.

There are two types of economic growth

 Actual growth can be defined as an increase in real GDP (increase in outputs) in
the short-run. (When statistics on growth rates are published, it is actual growth they are
referring to.)
 Potential Growth can be said as an increase in the productive capacity of the THE CAUSES OF ECONOMIC GROWTH
economy, that is an increase in the quantity and/or the quality of the factors of
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1) Demand side causes (an increase in aggregate demand) 1. Increased capital. e.g. investment in new factories or investment in
In the short term, economic growth is caused by an increase in aggregate infrastructure, such as roads and telephones can increase firms ability to
demand (AD). If there is spare capacity in the economy then an increase in AD produce and aggregate supply
will cause a higher level of real GDP. 2. Increase in working population, e.g. through immigration, higher birth rate can
increase human resource and reduce labour cost. This can increase production
3. Increase in Labour productivity, through better education and training or
AD can increase for the following reasons: improved technology can increase production and its quality.
4. Discovering new raw materials can increase country’s resources which help to
 Government can use monetary policy and Lower interest rates, which reduces extend production capacity and output
the cost of borrowing and so encourages spending and investment. This can 5. Technological improvements to improve the productivity of capital and labour
increase aggregate demand. e.g. Microcomputers and the internet have both contributed to increased
 Increased wages: Higher real wages increase disposable income and encourages economic growth
consumer spending. It also encourages people to work more and earn more, this
can increase national income, reduce poverty and improve standard of living. A fall in Real GDP (negative economic growth) can be caused by:
 Increased government spending (G) on unemployment benefits or state benefits
 Higher oil prices reducing living standards.
or education and health can increase their income and earning potential, this
 Global credit crunch leading to a fall in bank lending and investment.
can increase national income, also their consumption increases increasing
 Fall in house prices causing lower wealth and spending
aggregate demand.
 Fall in consumer confidence related to banking crisis.
 A fall in the value of the currency: exports cheaper and increases quantity of
exports(X). also imports will be expensive, shifting the demand to domestic CONSEQUENCES OF ECONOMIC GROWTH
goods, this can increase GDP and economic growth
ADVANTAGES OF ECONOMIC GROWTH
 Increased consumer confidence, which encourages spending (C).
 Government can use fiscal policy and Lower income tax which increases Economic Growth means an increase in real GDP. This increase in real GDP means
disposable income of consumers and increases consumer spending (C). This can there is an increase in the value of national output or national expenditure.
increase aggregate demand and economic growth
The benefits of economic growth include:
 Rising house prices, which create a positive wealth effect and encourages
homeowners to spend more.  Higher Incomes. This enables consumers to enjoy more goods and services.
Economic growth is a key factor to enable developing countries to reduce poverty
2) Supply side causes (an increase in aggregate supply:- productive capacity) levels.
(Aggregate supply is the total outputs of products in an economy and this is perfectly elastic (can  Lower unemployment. With higher output firms tend to employ more workers
be increased) if the economy has significant number of unemployed resources. AS will become creating more employment. However, a recession can increase the unemployment.
more inelastic when it approaches to the full employment level as all the producers will be
 Lower Government borrowing. Economic growth creates higher tax revenues and
competing for the limited resources and then AS will become perfectly inelastic when the economy
is at full employment level (no unused resources)
there is less need to spend money on benefits such as unemployment benefit.
Economic growth also plays a role in reducing debt. Hence borrowing can fall.
AS (potential growth / PPC) can increase for the following reasons:  Improved public services. With increased tax revenues the government can spend
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 more on the National Health Service and education etc. Or the government can Sustainable economic growth means a rate of growth which can be maintained
spend more on infrastructure projects, such as better roads and railways . without creating other significant economic problems, especially for future
 Money can be spent on protecting the environment. Countries with higher living generations.
standards can afford the luxury of protecting the environment.
There is clearly a trade-off between rapid economic growth today, and growth in the
Evaluation of Economic Growth. future. Rapid growth today may exhaust resources and create environmental
problems for future generations, including the depletion of oil, fish stocks, and global
 It depends on the type of economic growth. If growth is too fast and
warming.
unsustainable, it will probably cause inflation.
 It depends on the equality of distribution - does everyone benefit from growth ECONOMIC GROWTH RATE
or is it focused on a few individuals? If a country’s economic growth rate falls from 5% to 3%, national output may still be
 Is economic growth environmentally sustainable? Or does growth come from rising but at a slow rate. The positive economic growth indicates that the outputs are
exploiting Non-renewable resources? rising.

DISADVANTAGES OF ECONOMIC GROWTH If output reduces, the economic growth rate would be negative. For eg: ab economic
growth rate of – 2% would mean that a country has produced 2% less this year than
Despite the benefits of economic growth there are potential costs. These costs will
last year.
be greater if the rate of economic growth is too fast.
RECESSION
1. Inflation. If AD increases faster than AS then economic growth will be
A recession occurs when real GDP reduces over a period of six months or more. It
unsustainable. The output gap will narrow causing inflation to increase.
may be caused by a decrease in aggregate demand and/or aggregate supply.
2. Boom and Bust Economic Cycles. If Economic growth is unsustainable then high
inflationary growth may be followed by a recession. To reduce inflation the With lower output, unemployment is likely to rise. The reduction in output and
government increased interest rates, this caused the economy to slow down and incomes will lower living standards. Investments is likely to be discouraged will
then enter into a recession. However if economic growth is at a sustainable rate endanger future economic growth
this will not occur.
Explain what is meant by recession. [2]: This when all the economic activity slows
3. Balance Of Payments Deficit. Increased Economic growth causes an increase in
down. Firms will no longer wish to invest and this cause a fall in spending. There will
spending on imports therefore causing a deficit on the current account
also be a fall in demand, employment, economic growth and tax revenue or generally
4. Environmental Costs. Increased economic growth will lead to increased output
it is a period of economic downturns.
and therefore increased pollution and congestion. This will cause health problems
such as asthma and therefore will reduce the quality of life STANDARD OF LIVING AND ITS MEASUREMENTS
5. Increased inequality. Higher rates of economic growth have often resulted A person’s standard of living tells you how well off they are. We can measure
increased inequality, however this depends upon things such as tax rates and the standard of living by looking at;
nature of economic growth  Their average income or real GDP per head (main measure)
6. if the country is at full employment level, then the resources have to be shifted in producing capital
 Productive capacity
good, which will reduce production of consumer good and can reduce the people’s standard of
living, but this for a short term, in the long term, capital goods can produce more consumer goods.  The average number of food intake per person

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 Price level Clearly, this index gives us a better way of estimating standards of living than just
 Balance of payment position GDP taken on its own.
 The number of patients per doctor However, it is still far from perfect.
 Literacy rate: (The percentage of people who are able to read and write) -It has been stated that the index would be high for someone who’s well educated
 Sector of employment living in prison for a long term.
 Enrolment in tertiary education -It does not include the political freedom and the environment.
 The average life expectancy -It does not consider the differences between the life expectancy and the education
 The infant mortality rate level of male and female, neither between those living in rural and urban areas
 Population growth and other ethnic groups.
 Human development index
 Index of sustainable economic welfare Define Gross Domestic Product. [3] If refers to the total value the total quantity of
goods and service produced by the factors of production located within the country
Comparing living standards between countries during a year.
1. Real GDP and real GDP per head It can be measured in nominal (current price) and real (after deducting inflation)
- population size and adjustments of inflation take into account in this terms
- however, it excludes the differences in the income distribution, size of the informal
activity, working hours and conditions, composition and quality of output, and
environmental conditions Analyse why a country may have a high HDI value. [6]
- the problem of measuring real GDP per head with the national currency, but for the  a good healthcare system/high spending on healthcare as this can increase the life
comparison it has to be in common unit, the international currency. So this value might expectancy, which is an index included in HDI
be distorted when changing into US $. Also the US $ rate changes daily basis.  high investment in hospitals (1) will increase people’s life expectancy and then the
2. Human development index (HDI) HDI (1)
 a good education system/high spending on education can increase the education
HUMAN DEVELOPMENT INDEX (HDI)
index and then the HDI(1)
The Human Development Index is wider measure than real GDP per head. HDI
 high income/more schools enabling families to send their children to school for a
includes the following measures.
number of years (1) can also increase the education index which will increase the
1. Income index: Real GDP/GNP per capita expressed in terms of US dollar HDI
2. Life Expectancy at birth: the average number of years a person is expected to live in a  positive attitudes to education (1) may lead to higher mean/expected years of
country. schooling (1) which can also increase the education index and then HDI
3. Education index: this is made up of two elements,  a high level of total demand (1) and good quality of resources/high productivity (1)
i) Mean Years of Schooling: this is the number of years that a 25 year old person or can result in a high GDP per head and high income for people leading to an increase
older has spent in school, in income index and then the HDI (1)
ii) Expected Years of Schooling: This is the number of years that a 5 year old child will
spend with his/her education in his/her own life.
Explain how the Human Development Index is measured. [6]
There are three parts to Human Development Index
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1. the first is the Income Index: In income index, the standard of living of the people
 So, HDI is a good measure of living standard than others but still there are more than
are measured. This is done by calculating real GDP/GNP/GNI per capita/head.
this to determine standard of living. A range of factors must be given a thought.
2. The second is the measurement of life expectancy at birth. In this, the longevity is
measured by measuring how many years the people are expected to live from birth Explain why the pattern of employment might change. [8]
3. The third is the education index: in this, they measure the adult literacy rate, and
Pattern of employment refers to level of workers in different sectors, industries, jobs,
how many people are enrolled in education, how many years they have spent in
male-female proportion and child-adult proportions labour force. The pattern of
schooling (mean number of years) and how many expected years of schooling will
employment of a country changes due to many reasons.
be measured.
 Firstly it may be due to economic development of the country. When a country is less
Discuss how useful Human Development Index (HDI) measures living standard developed high % of labour force is the primary sector. When it develops the more
between different countries. [8] labour force moves to secondary then to tertiary sector as real income and demand
for services increase.
HDI (Human Development Index) is the average of three indices;
 Also various rules, regulations and policies of government may affect the pattern of
 the first one is GDP (Gross Domestic Product) then life expectancy and education of employment of a nation. Government influence on industries such as employment
which 1/3 is adult literacy rate 2/3 is average years of schooling. laws, deciding the retirement age, increasing public expenditure fiscal policy,
 HDI is more useful indicator in measuring living standard between different countries monetary policy, supply-side policies bring changes in employment statistic.
than GDP and GNP.  Also changes in structure of population has also influence or pattern of employment.
 This is because it takes into account level of education, healthcare and GDP. It can be An increase in working population, a decrease in working age group, increasing and
measured in normal and real term in relation to GDP. decreasing of birth rate, death rate and net migration can also bring frequent
fluctuation in the pattern of employment.
 Real HDI include GDP figure adjusted for rise in price level. Nominal HDI include GDP Discuss how effectively Gross Domestic Product (GDP) measures the standard of
valued it the current market price level of goods and services. living in a country. [7]
 It can be divided by the population to find HDI per capita which is a more efficient
measure of living standard.  To have a high level of GDP (Gross domestic product) is a macro-economic aim of any
 It considered level of healthcare in the society, adult literacy rate and average years government. However, it only measures standard of living of a country to a certain
of schooling to result a more correct measure of standard of living. extent effectively as other factors also is needed to take into account.
 GDP refers to the annual domestic production of economic output a country from
 However, it is very far from begin perfect. This is because it omits many influences factors of production located within the boundaries of the country itself. GDP is
on standard of living of citizens of a country. measure in real and nominal term.
 It close to include the distribution of income in an economy so inequality of income  Real GDP measures the total value of goods and service after the price are adjusted
and wealth is not considered, for inflation. Normal GDP measures total value of goods and service at current price.
 it also ignores social cost in the society such as pollutions congestion etc.  GDP per capital is a more effective measure which calculates the total national
 Also Factors like number of doctors per person, average calories per days, working income per head as GDP id divided by total population of the country.
hours, etc.… have a strong effect on the standard of living of locals in the nation.  However, GDP may shows misleading information. This is because it does not include
 Besides, it is first calculated in terms of United States Dollar (USD $) domestic distribution of income as inequality of income and wealth is not considered.
 It also does not include social cost such as pollution, congestion etc.
currency and then converted into domestic currency. So due to very high or very low
 GDP only measure the value of goods other important factors needed to determine
exchange rates set for different purposes it may show misleading figures.
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 living standard such as education, health working hours. How may living standards between countries be compared? [7]
 Also GDP is first calculated in terms of home currency. Then it is converted into US To have a Standard of living is a macro-economic aim of any government or nation. It can
currency. So due to the exchange rate, it may show very high or low unreal values. be measured in a range of methods.
So, GDP is far from an effective measure of standard of living as there are many factors to  Firstly, GDP can be used to compare living standard between nations. Gross Domestic
be considered and HDI is more effective. products value of the total quantity of goods and services produced by the factors of
production located within the country during a year. If GDP or annual production of
Why might an increase in Gross Domestic product might improve living standard of economic output in a country is higher, it is considered developed than the other with
a country? [6] low GDP so undeveloped.
 Also Education level also plays a great role in comparing living standard between various
 Gross Domestic Product (GDP) is used world-wide to measure standard of living nations. If level of education in a country is low its citizen’s standard of living is low and
between countries. This is because a rise in GDP lead to high production in an vice-versa.
economy.  Besides, the citizens of a country is has a high standard of living if health care facilities
 Higher production / increasing annual output of the country means higher available in the country is higher so a country’s people with low health care facilities will
employment rate. When more people are out at work, the income of the local people have lower living standard than the other.
increases which leads to eradication of poverty within the society. This is because the  Moreover, the standard of living of locals in a country considered high, if level of housing
standard of living of nationals rise. in the country is better a quality deluxe. This is because if level of housing is poor in
 Also more people working and paying income tax to the government which leads to quality, the people of that particular country is likely to have a lower standard of living.
increase in government’s national income which leads to government budget surplus  Furthermore, some countries have more percentage of people living in poverty than
which can be spent on various development projects leading to a higher living other there may be less percentage of population living in poverty so that is will tend to
standard of people in the community give its citizens a higher standard of living than the other.
 The people of a country which as narrow range of transport service if comprised with low
Explain why inflation can be harmful to an economy. [6] living standard while another with wide range is identified as high living standard. HDI
Inflation is the persistence rise in the general price level of goods and services in a given (Human development index) which include healthcare, education; adult literacy rate and
period of time. it is considered dangerous due to an economy for a number of reasons. average year of schooling if higher the country enjoys a high living standard and vice-
versa.
 Firstly ,due to inflation ,some workers, whose wages are not linked to the rate of inflation
will be facing a serious problem as they will find that real value of their
earnings/purchasing power falls.
 Moreover, it will particularly be a problem for those not in trade union or in trade unions
that are weak and not powerful. This is because the trade union is not effective to
increase the wage level to meet raising price.
 Furthermore hose people/ who are on the fixed income lose out as the real income of
them falls.
 Besides, if the rate of inflation is relatively high, it can make them less competitive
leading to reduced surplus or a deficit in the countries balance of payment.
 Also, if the rate of inflation is very high example 100% or 1000% in period of
hyper/galloping /run away inflation.it may cause the currency to collapse.
 Additionally, lenders loose at the expenses of borrowers as they will receive less in real
money terms from borrowers as due to inflation.
Due to these such reasons, inflation can be very much harmful to the economy.

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