IGCSE Economics; Economic Indicators

Measuring Inflation

The Retail price Index (RPI)

• This is a price index that shows the general change in prices over time as a %.
• A hypothetical basket of goods and services which represents a normal households spending.
• The items are ‘weighted’ to reflect the % of income spent on them.
• Each month the prices of the goods & household spending patterns are monitored and the RPI is calculated.
• The index has a ‘base year’ and the % change is measured from this.

Causes of Inflation

Cost-Push Inflation

• Increases in wages & raw material 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 & so workers then demand higher wages again & so on.

Demand-Pull Inflation

• Excess demand (an increase in demand without an equal increase in supply) pulls prices higher.
• Usually output can be increased to match demand but if there is full employment then extra workers cannot be employed to increase output. It could also be a shortage of a raw material that limits supply.

Monetary

• Increases in the money supply that are greater than increases in output (more money chasing same output).
• Can be classed as demand-pull inflation.

Effects of Inflation

• The value of money falls (each $ buys less). Hyperinflation may lead to loss in confidence of the currency.
• Redistribution of income:
  • savers lose out as their savings lose ‘real’ value & 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’ (linked to the changes in the rate of inflation).
• Increased costs for firms: changing prices, labels, working out future costs.
• Balance of Payments: increased prices make a country’s exports less desirable & imports seem comparatively cheaper. This can lead to further issues such as unemployment.

Measuring Unemployment

Measured as the % of the labour force who are willing & able to work and looking for a job.

Methods for measuring unemployment vary & generally the official rate is lower than the actual number of people looking for work.

Types of Unemployment

• Frictional unemployment: people between jobs - tends to be short term.
• Structural unemployment: industrial change 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).
• Cyclical unemployment: high unemployment in times of recession.
• Immobility of labour: workers are generally fairly immobile (home, family) & only seek work in their region.
• Technology: increases in technology have replaced some jobs and reduced number of workers in others.
• Minimum wage: increased labour costs may force employers to hire less workers.

Effects of Unemployment

• Increases in unemployment lead to higher costs for the Government (support & benefits) & at the same time less income for the Government (income tax). This could mean higher taxes for the working population or reduced spending on schools/hospitals/emergency services etc.
• Increased unemployment means less output & so less goods and services for people to share.
• Increased costs to society through higher crime rates, higher health bills (alcoholism/depression), increased rates of divorce.

Measuring Output

Gross Domestic Product (GDP)

Definition: The total value of the goods and services produced in an economy over a given time period.

This is the standard measurement but there are several variations that are used to provide a clearer picture of what is happening in the economy.

• Nominal GDP: GDP valued using the current prices (no inflation consideration).
• Real GDP: GDP that has had the effect of inflation removed.
• Real GDP per capita: average Real GDP per person in the country. This allows any changes in the population size to be reflected.

Measuring Quality of Life

Human Development Index (HDI)

This is an index that takes into account 3 factors (each is an index itself):

• Life expectancy index
• Education index
• Income index

It generates a score between 0 and 1. The closer to 1 the higher the quality of life.

It is considered a better measure of overall development then GNI or GDP because it takes into account social factors aswell as purely economic ones.