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is easier for households to plan, firms to invest and governments to change spending
patterns.
(Re)distribution of income, the government aim to ensure everyone has access to the basic
necessities and/or to more equally distribute income. However if done too much, this will
reduce business incentives and working for income.
Potential and Actual growth, by achieving both potential and actual growth, inflation
(caused by a positive output gap) and unemployment (caused by a negative output gap)
are kept low as the output gap is held constant.
Reduction in 'regrettables', increased spending on things such as police to deal with an
increase in crime will lead to negative impacts on standard of living if this spending is
ineffective because of the opportunity cost of the spending
In addition to their major objectives, governments also have several minor objectives:
This uses the ILO definition of unemployment, i.e. people who are able, available and willing
to work at the current wage rate but do not have a job. The ONS interviews the residents of
60,000 households each quarter as a sample of the total population. They ask about the residents'
employment status and nature of employment. Statistics for the entire UK are then extrapolated
from the sample.
The Labour Force Survey is the official measure of unemployment in the UK.
All those who are registered as claiming Job Seekers Allowance at benefit offices on the day of the
count are counted as unemployed. Therefore to be recognised as unemployed, the individual must
satisfy the conditions for claiming the benefit. This process happens once per month, however is
not the official measure of unemployment for the UK.
The claimant count simply counts the number of people claiming unemployment-related benefits.
Claimant Count
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The Bank of England target inflation rate is 2%, with a 1% fluctuation allowance either side.
The CPI measures the average level of prices, replacing the RPI in 2003. CPI is based on the
HICP (Harmonised Index of Consumer Prices) used throughut the EU.
Inflation is measured using index numbers. Each month, the average price level is calculated and
recorded as the CPI (Consumer Prices Index). The rate of inflation is calculated by finding the %
change in CPI.
Measuring Inflation
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The percentage changes in the prices of the items are multiplied by their weights, and combined
to give the overall CPI for the month.
Price data for each of the items in the basket is collected every month, using a range of retail
outlets in 180 different areas, with more than one price collected for each item. The average price
of the item is then calculated.
Measuring Inflation 3
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Measuring Inflation 2
The CPI is calculated each month and measures the average change in the prices of consumer
goods and services. Items are weighted according to what consumers spend most of their money
on. Every year the weightings are recalculated and the goods included in the CPI are changed.
It is calculated by the ONS.
The weights are calculated by the Expenditure and Food Survey, which is conduceted every year to
find out the spending patterns of 7,000 households. These households are supposed to represent
a typical cross section of the population.
The 650-700 items that take up the greatest proportion of consumer speding are selected for the
'basket' of goods for the CPI. Each item is given a weighting reflecting their share of total spending
as consumers will be more affected by a price increase in these goods.
If the PPC (Potential output) expands faster than actual output, this creates spare capcity, known
as the output gap.
On a PPC, actual growth is shown by making more and better use of resources, shown by moving
closer to the PPC. Potential growth is shown by an expansion (rightward movement) of the PPC.
This shows an increase in the quality and/or quantity of FoP.
Potential Growth: This is when there is an increase in the productive capacity of a economy.
Actual Growth: This is when an economy produces more goods and services.
Economic growth is the increase in the output of an economy of goods and services. This is
generally considered to be good, as this means more goods and services are being consumed,
which we assume will increase our standard of living.
Economic Growth
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National income is what is newly produced in an economy in a year, and adds to national wealth.
National wealth is the stock of goods, services and money (assets). However, depreciation reduces
national wealth as assets lose value.
An unsustainable activity is anything that comprimises the ability of future generations to meet their
needs. For example the use of fossil fuels may mean that future generations have limited access
to energy, hindering output. Sustainable growth is when these things do not happen.
Sustained growth is when both potential and actual growth are achieved simultaneously.
Collectively, these are known as the National Income Statistics (NIS). GDP is used most often, and
GNP is used occasionally. NNP is rarely used as depreciation is almost impossible to measure
accurately.
GDP, the total value of a nation's domestically produced output within a time period
GNP, the value of income accruing to a nation's citizens irrespective of the location of the
FoP tht generated it, within a time period
NNP, value of a nation's income within a time period
Growth is usually measured yearly using the output method, by calculating the % change since
last year. There are 3 different measures of growth:
Measuring Growth
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This method aggregates expenditure made in a year by both individuals and organisations on new
products. There are 5 main types of expenditure:
Expenditure Method
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Divide by population size to get GDP per capita for fair representation of the population.
Convert to $ using the Purchasing Power Parity exchange rate to easily compare GDP in
relation to costs of living in different economies.
Real GDP accounts for rises in prices during the period of production, nominal GDP is
adjusted to remove inflationary price rises. Real GDP is calculated by measuring GDP at
constant prices from a selected base year.
The NIS are used to calculate growth, compare living standards and compare economic
performance. To accurately compare data, three adjustments are made:
Composition of Output - a nation may have a high GDP p/c, but living standards may
be relatively low if the products made are not for current consumption, for example an
economy based largely on military expenditure will generally not have high living standards
Distribution of Income - a nation may have a high GDP p/c, but this may not reflect how
the income is distributed, and so may not reflect the relative living standards of its citizens.
Middle Eastern countries are a good example of this.
Poor Data - In LEDCs, data is often incomplete, unreliable or simply not available. There
are no sophisticated recording mechanisms in place, and the governments do not have
either the resources or expertise to record or share data.
Illegal activities - The black market, tax evasion and benefit fraud all increase standard of
living, but are not recorded or are recorded when they should not be.
Current Account
Capital Account
Financial Account
There are 3 categories to the BoP:
If inflows are greater than outflows, there is a BoP surplus, if ouflows are greater than inflows there
is a deficit.
The BoP is a record of all the inflows and outflows of money in a country. It is calculated by
subtracting outflows from inflows (debits from credits).
Balance of Payments
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Leisure
Political freedoms
Quality of products made
Pollution and envionmental quality
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