2.1 Measures of Economic Performance

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What is economic growth?
Rate of change of output
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What is GDP?
Total value of the goods and services produced in a country within a year
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What is the difference between total GDP and GDP per capita?
Total GDP is the overall GDP for the country, and GDP per capita represents GDP divided by the number of people in the country
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What is the difference between real GDP and nominal GDP?
Real GDP is adjusted for inflation, nominal GDP is the actual value of GDP
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What is the difference between value and volume of goods and services?
Value is equal to the volume times the current price level
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What is GNI?
The value of goods and services produced by a country within a year plus net overseas interest payments and dividends
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What values are used when comparing economic growth between countries and why?
Real GDP per capita to account for the fact different countries have different populations
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What is purchasing power parity?
An exchange rate of one currency for another which compares the value of a typical basket of goods between the countries
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What does PPP take into account that GDP does not?
Cost of living
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What are 3 limitations of using GDP to compare living standards?
Inaccuracy of GDP values - Black market
Some types of spending do not increase standard of living but do increase GDP - Government spending on defence
Income not distributed evenly across countries
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Why is income distribution a problem when using GDP for comparisons?
An increase in GDP may not be representative of the whole country as it may be due to one group of people
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What are the six factors which affect national well-being?
Health
Life expectancy
Freedom of life choices
Freedom from corruption
Real GDP per capita
Having someone to count on
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What is the relationship between real incomes and subjective happiness?
When real incomes increase, subjective happiness increases
The amount of happiness depends on if the household is low income or high income, high income households feels the effects less
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What is inflation?
The general sustained increase of prices, causing a decrease in the purchasing power of money
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What is deflation?
The general sustained decrease of prices, causing an increase of the purchasing power of money
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What is disinflation?
When there is inflation at a slower rate
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What is the process to calculate CPI?
ONS collects prices on 710 goods and services every month - Goods called basket of goods
Prices combined with average household spending to create an overall price index - From Living Costs and Food Survey
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How does RPI differ to CPI?
Does not take into account the top 4% of earners
Takes into account housing costs
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What are the limitations of CPI?
Not totally representative - Every good in the country is not evaluated
Does not include housing costs - Data may be inaccurate
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What are the three causes of inflation?
Demand pull
Cost push
Growth in the money supply
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Explain demand pull inflation
Increase in aggregate demand
Prices increase
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Explain cost push inflation
Decrease in aggregate supply
Prices increase so firms maintain their profit margin
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Explain how growth of the money supply causes inflation
When money is printed at a faster rate than real output
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What are the effects of inflation on consumers?
Purchasing power falls, therefore the same amount of money will buy less
Cost of necessities increase, so less disposable income, consumption decreases
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What are the effects of inflation on the government?
Must increase the payments of state pensions and welfare - Cost of living is rising
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What are the effects of inflation on firms?
Less likely to invest
Less price competitive in global prices
COP increases
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What are the effects of inflation on workers?
Real incomes decrease, therefore the value of income decreases
Workers demand higher income
Redundancies may be made
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What are the two measures of unemployment?
Claimant count - Number of people claiming job seekers’ allowance
Labour force survey - Survey asking if people meet the criteria of unemployed
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What are the limitations of the claimant count?
Not everyone is eligible for JSA
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What is the difference between unemployment and underemployment?
Unemployed are those who are actively seeking work but do not have a job
Underemployed are those who have a job which they are overqualified for, or a part time job when they want a full time job
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What are the effects of unemployment on consumers?
Less disposable income and standard of living may fall
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What are the effects of unemployment on the government?
Fall in tax revenue and increase in benefit payments - Increase in budget deficit
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What are the effects of unemployment on firms?
Usually decrease in demand for goods depending on YED
Can offer low wages as jobs become inelastic
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What are the effects of unemployment on workers?
Fear getting fired especially if they have low job security
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What are the effects of unemployment on society?
There may be negative externalities like crime
Greater spare capacity so economy is under working
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Who are the economically inactive?
Those who are currently not looking for jobs
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What can happen when there is increased inactivity in the economy?
Size of the labour force may decrease, productive potential of the economy could fall
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What are the different types of unemployment?
Structural, frictional, demand-deficient/cyclical, seasonal, real wage inflexibility
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Explain structural unemployment
When there is a decrease in demand for workers due to increased machinery or the lack of demand for a good or service
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Explain frictional unemployment
The time between leaving a job and looking for another job
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Explain seasonal unemployment
Occurs at different points in the year due to decreased demand for workers or goods/services
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Explain demand-deficient/ cyclical unemployment
Explain cyclical unemployment
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Explain real wage inflexibility
When wages are above the market equilibrium, causing excess supply and a lack of demand for workers
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What are the benefits of migration for employment?
Supply of labour tends to increase with migration
Can lead to lower wages when migrants see jobs as inelastic
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What is the balance of payments?
Record of all financial dealings over a period of time between economic agents of one country and other countries
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What are the three components of the balance of payments?
Current account
Capital account
Official financing account
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What is a current account surplus?
When exports > imports
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What is the UK current account status?
UK has a surplus with services but a deficit with goods
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What are the UK’s governments macroeconomic objectives?
Full employment
Stable inflation at 2% plus or minus 1%
Sustainable current account
Sustainable economic growth
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In theory, what should the sum of all countries’ trade balances be?
0
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What happens if a trade partner faces an economic downturn?
Imports of the trade partner will decrease causing a decrease in exports
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