Unit 6: Economic Indicators

Consumer Price Index (CPI):

 This is a price index that shows the general changes in prices over time as a percentage
 It consists of a hypothetical basket of goods and services that are meant to represent
normal household spending
 The items are “weighted” to reflect the percentage of income spent on them
 Each month (or quarter) the prices of the goods and household spending patterns are
monitored, and the CPI is calculated
 The index has a “Base Year” and the percentage change is measured from this.
Types of Inflation:

Cost Push Inflation:

 Increase in wage and raw materials costs push production costs up and
result in higher prices
 If increases in wages are matched by an increase in worker productivity,
then unit costs should not rise
 A “wage spiral” may occur when workers demand higher wages leading
to higher prices and so workers then demand higher wages again and so on.
Demand Pull Inflation:
 Excess demand (an increase in demand without an equal increase in supply) pulls prices
higher and thus causes inflation
 Usually output can be increased to match demand, but if there are restriction on factors of
production then output cannot be increased. Examples of these restrictions would be full
employment, where additional workers cannot be employed to boost production. Another
example would be some shortage of a raw material.

Monetary Inflation:
 Increases in the money supply that are greater than increases in output (more money
chasing the same output) can lead to inflation
 This type of inflation can be classed as demand pull inflation.

Consequences of inflation:
 The value of money falls (each dollar buys less). Hyperinflation may lead to a loss in
confidence of the currency of a nation
  If bank interest rates are lower than inflation, then there is a general redistribution of
income:

Savers lose out as their saving lose “real” value, while borrowers gain as they repay less in
“real terms” than they borrowed
People on fixed incomes (pensioners, students) see their real income fall unless it is “index
linked” to changes in the rate of inflation

 There is an increased cost for firms because of changing prices, cost of printing new
labels and working out future costs
 It can affect the Balance of Payments for governments. Increased prices make a country
exports less desirable and imports seem comparatively cheaper. This can lead to further issues
such as unemployment

Employment:
 Employment rate is measured as the percentage of the labor force who are willing and
able to work and are currently looking for a job
 Methods for measuring unemployment vary and generally the official rate is lower than
the actual number of people looking for work

Types of unemployment:

Frictional unemployment: People that are between jobs. This tends to be short term
Structural unemployment: Industrial changes over the long term can leave sectors of the
labour force with skills that the economy no longer demands
Seasonal unemployment: Labour only demanded at certain times of the year (fruit
pickers/tour guides/Santa Claus)
Cyclical unemployment: High unemployment in times of recession
Immobility of labour: Workers are generally immobile because of where their home or family
are, so only seek work in their region
Technology: Increases in technology have replaced some jobs and reduced numbers of
workers in others
Minimum wage: Increased labour costs may force employers to hire less workers
 

Consequences of unemployment:
 Increases in unemployment lead to higher costs for the Government (through support and
benefit payments), while at the same time reducing income for the Government (less income
tax). This can lead to higher taxes for the working population or reduced spending on
schools/hospitals/emergency services as the Government seeks to balance their budget.
 Increased unemployment means less output and so less goods and services for people to
share. Reduced good and services could lead to high inflation and unemployment (stagflation)
occurring together.
 Increased costs to society through higher crime rates, higher health bills
(alcoholism/depression) , and increased rates of divorce

Gross Domestic Product:

 The most common measure of economic growth is a country’s Gross Domestic Product
(GDP). This is the total value of final goods and services produced within the country in a
year. This includes the value of goods and services produced within one’s borders by overseas
companies (such as Samsung in Hong Kong), but excludes the value of goods and services
produced by local companies operating overseas (e.g. Hong Kong firms such as Bossini
operating in Indonesia).
This definition is very important.
Value is not a measure of quantity as amount is, rather it is a measurement of both quality and
quantity.

GDP in action:
 Multinational firms owned by Hong Kong people but which operate elsewhere do not add
to Hong Kong’s GDP.
 Car tires sold to a car manufacturer do not count as GDP because they are not a “finished
good”.

GDP around the world:

 USA has a high GDP:
 They could raise this if they did not allow firms to globalize.
 UK has a low GDP:
Most of its firms operate elsewhere.
 GDP rises are not necessarily good things:
The rise may just cause an increase in income disparity.
 GNP includes the value of goods and services produced by multinational firms owned by
people from one’s own country but which do not necessarily operate within the borders of said
country. But it excludes the value of goods and services produced by foreign companies in
one’s own country.
It is not a measure of what a country is producing.
Local factories have local workers and even if most of the revenue is going elsewhere those
goods are still being produced locally and not by foreigners.

Reasons for using GDP:

 All governments collect GDP data to check on the economy’s progress since all
governments have goals and objectives:
This is because it is important for a government to determine:
 Whether their economic policies are good.
 And whether or not the economy is in trouble and needs rescuing.
 It makes it easier for investors, NGOs (Non-Government Organizations), and institutions
to compare data.

Purchasing Power Parity (PPP):

 This means that an amount of money has been adjusted to how much it can buy (how
much it is worth) of another currency, usually the US dollar.
Where an amount of money has the same value even when it is converted into another
currency.
 This makes comparing values such as GDP much easier internationally.
GDP per Capita:
 GDP per head or GDP per person = Total GDP / Total Population.
 This is a very good indicator of standard of living and the average wealth of people
within a nation:
However it does not tell us about the wealth distribution within a nation.
It also does not tell us how much a nation produces as a whole:
 Luxembourg has a higher GDP per capita than China:
 But it does not produce nearly as much as China does.
 They have a higher GDP per capita because they have a much
smaller populace (half a million in Luxembourg compared to the 1.3 billion people in China).