1.

Indicators of economic performance

a. Inflation a sustained rise in the general level of prices. i. RPI Retail Price Index. A sample of the population records their expenditure. An index of weighted goods is based upon their spending. The changes in the price of the bas et of goods! show how the price levels are changing over time. ii. RPI" # RPI mortgage repa$ments% because mortgage repa$ments can have distorting effects on the RPI. iii. &PI # RPI" with less weight on housing costs. Is therefore less than RPI". &omplies with '( guidelines so the best 'uropean measure. b. Unemployment the macroeconomic problem of wasted scarce resources labour i. &laimant count all those out of wor and able to claim benefits ii. I)* International )abour *rganisation% based on the )+, -)abour +orce ,urve$.. (nemplo$ed are those who are available for wor and have loo ed for wor in the last month. I)* is better for international comparisons but is costl$. Also is an underestimation because is doesn!t includes part/time wor ers c. Balance of payments record of financial transactions between (0 and other countries. ,plit into different components1 i. &urrent account This is an indication of competitiveness of (0 goods and services. Trade in goods balance -exported goods imported goods. 2 Trade in services balance -exported services imported services. 2Net income flows -interest% profits 3 dividends earned abroad interest% profits 3 dividends paid to foreign holders of (0 assets. 2 Net current transfers -(0 contribution to '( budget. ii. &apital and financial account. 4oth show long term capital flows. Includes1 foreign direct investment% short term capital flows -hot mone$. investments in shares and changes in gold 3 foreign currenc$ reserves. d. Economic Growth measured b$ changes in R'A) 56P per head e. Gross Domestic roduct! Gross National roduct " National Income 56P% 57P and 7I refer to the value of goods and services produced b$ an econom$. 56P can also be viewed as the total income of ever$one in the econom$ or as the total expenditure on the econom$!s output of goods and services. i. 56P at mar et prices # #onsumers$ e%penditure &#' ( ublic authorities$ e%penditure &G' ( )alue of physical increase in stoc*s! gross domestic fi%ed capital formulation &I' ( E%ports &+' Imports &,' ii. 56P at mar et prices # GD at mar*et prices ( -ubsidies Indirect ta%es iii. 57P # GD at mar*et prices ( net property income from abroad iv. 7ational income # GN depreciation. 56P statistics are used to compare standards of living between countries% to build models of the econom$ and to forecast changes in the econom$ /eal GD is better than Nominal GD services at constant prices because real 56P is the value of goods and

Polic$ instruments
-upply2side olicies A range of policies aimed at enhancing the performance of an econom$ b$ strengthening mar et forces and increasing economic incentives -upply2side olicies in 6abour ,ar*ets ma e labour mar et more competitive Education and training increase the number of those able to do wor and improve the s ills of those currentl$ in wor . 6ower income ta% Increase the incentive to wor % more net/income. 6owering benefits gives those on benefits a higher incentive to wor /educing trade union power ma es the labour force more competitive -upply2side olicies in the roduct ,ar*et increase competition and efficienc$ in the mar et rivatisation this will increase or create competition within industries Deregulation this involves opening mar ets to greater competition. It invites more competitors which in turn drives down prices 3ree trade this will increase efficienc$ through the increase in competition and will eep costs low. roblems of -upply2side olicies &Evaluation points' The$ can be effective in the long run but ta e a long time to implement% with no immediate benefits -especiall$ education/ can be decades. Policies might also be morall$ incorrect and lead to a more une8ual distribution of income -cutting benefits is harsh on those who are oliciesdisabled. a range of policies designed to influence the level of aggregate *nl$ wor in the opinion of ,uppl$/side economists i.e. a cut in income 3iscal policy &hanges in wor public expenditure to influence level of A6. tax might not lead some to more.

Demand2side demand.

#hanging ta% levels increasing tax # lower disposable income less A6% decreasing tax # more disposable income more A6 #hanging Government spending higher 5ov. spending # more A6 -b$ multiplier.% lower 5ov. spending # less A6 - b$ negative multiplier. roblems of 3iscal policy +iscal polic$ ta es a long time to implement -taxes have to wait until the annual budget% building a new hospital for example ma$ ta e $ears.. Also% the effect of fiscal polic$ is entirel$ dependant upon the multiplier effect% and also consumer and business confidence. ,onetary policy &ontrolling mone$ variables such as the rate of interest and the mone$ suppl$% to influence Aggregate 6emand. The rate of interest is inversel$ proportional to Aggregate demand -ceteris paribus. as interest rates go up% aggregate demand goes down. This is for a number of reasons. #onsumer Durables ;an$ consumers bu$ these on credit. <hen interest rates are high% repa$ments will be higher so less are purchased. 4ousing ,ar*et =ouses are bought on a mortgage so when interest rates are high% repa$ments are also. -avings rates =igh interest rates increase the ;P, it is more attractive to save% less attractive to

(sing 56P statistics to compare standards of living and national income have serious limitations such as1 population si0e and age distribution -therefore 56P per head is better. Income distribution -56P would onl$ wor if income distributions were e8ual in all countries% because if 9apan!s and 4ra:il!s 56P were the same% then $ou would assume that the standards of living are e8ual% even though 4ra:il!s income distribution is much more uneven than 9apan!s.. E%ternalities -these ma$ affect standards of living. 1uality of life 3 E%change rates