Economics 2.1 Measures of Economic Performance
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137 Terms
What is economic growth?
the increase in the real value of goods and services produced in an economy over a period of time
How is economic growth measured?
Measured by the percentage change in real GDP per annum.
Can also be shown by a rightward shift of the PPF (Production Possibility Frontier).
What is GDP?
GDP (Gross Domestic Product) is the total value of goods and services produced within a country in a year.
It is a standard measure of output and standard of living.
What’s the difference between total GDP and GDP per capita?
Total GDP: Measures a country’s total output.
GDP per capita: Total GDP divided by the population.
GDP per capita increases if output grows faster than population.
What’s the difference between real and nominal GDP?
Real GDP: Adjusted for inflation → reflects the volume of output. Measure of the increase in amount of output produced
Nominal GDP: Not adjusted for inflation → reflects the value at current prices. Measure of the increase in value of output produced.
Formula: Value = Volume × Current Price Level
What is Gross National Income (GNI)?
Is GDP plus the value of output produced abroad by uk owned business plus income earned by uk citizens working abroad minus output produced in the uk by foreign owned business and income earned by foreign citizens working in the uk
What is Gross National Product (GNP)?
GNP = Value of goods/services produced by a country’s citizens both domestically and abroad.
GDP includes all production within the country, while GNP focuses on who produces (citizenship-based).
How can national income data be used to compare growth over time?
Shows if an economy has grown or shrunk.
Must compare to similar countries and use real, per capita GDP to account for inflation and population growth.
Rising real GDP per capita generally = improved living standards.
Why should we use real GDP per capita for comparisons over time?
Real GDP removes the effects of inflation.
Per capita adjusts for population changes.
Helps avoid misleading conclusions about living standards.
Why must we be cautious comparing GDP between countries?
Different population sizes affect GDP totals.
GDP per capita provides better comparisons of living standards.
Different inflation rates mean comparisons must use real GDP.
What are Purchasing Power Parities (PPPs)?
PPPs are exchange rates that compare how much a basket of goods costs in one country versus another.
They are used to adjust GDP figures for differences in cost of living.
Why are PPPs better than exchange rates when comparing GDP?
PPPs account for cost of living differences, giving a more accurate comparison of living standards between countries.
They avoid distortions caused by volatile exchange rates.
What happens to GDP comparisons when using PPPs?
The gap between rich and poor countries' GDP narrows.
Poorer countries appear richer under PPP due to lower living costs.
What is a real-world example of PPP comparison?
The Big Mac Index – compares the price of a Big Mac globally to assess whether currencies are over/undervalued using the same product.
What does GDP stand for, and what is its purpose?
Gross Domestic Product – It measures the total value of goods and services produced in a country within a specific time period, used to compare economic activity and living standards.o unreliable comparisons.
What are the major problems with using GDP to compare standard of living between countries?
Inaccuracy of Data
Hidden/Black Market
Exclusion of Home-Producing Services
Errors in Calculating Inflation
Changing Methods of Calculation
Transfer Payments
Income Inequality
Quality of Goods and Services
Currency Conversion Issues
Spending on Non-Welfare Items
What is the problem of 'inaccuracy of data' in GDP comparisons?
Countries may have inefficient or inaccurate methods of collecting or calculating data, making GDP comparisons between countries unreliable.
How does the ‘hidden’ or ‘black’ market affect GDP?
Work done informally, such as under-the-table jobs, is not recorded in official GDP statistics, leading to an underestimation of the country's true economic output.
What impact does the informal economy have on GDP calculations?
It causes GDP to be underestimated because income from unreported activities (like tax evasion or working under the radar) is not captured in official data.
How does home-produced work or services (e.g., subsistence farming) affect GDP?
GDP does not include non-market activities like farming for personal use or unpaid household work, which underestimates the economic activity, especially in poorer countries.
Why is DIY and unpaid care work excluded from GDP?
These activities are not traded in the market and therefore don’t appear in official GDP measurements, even though they contribute to the standard of living.
How do errors in calculating inflation affect the accuracy of GDP?
If inflation is calculated incorrectly, real GDP (adjusted for inflation) may not accurately reflect true changes in living standards, leading to distorted comparisons.
Why are changes in the methods of calculating GDP over time problematic?
Different methods for calculating GDP (e.g., changes in national accounts or revisions in price indices) can lead to inconsistencies, making historical or international comparisons difficult
How does income inequality affect the relationship between GDP and standard of living?
A rise in GDP may benefit only a small group of people (e.g., the wealthy), meaning that GDP growth does not always improve living standards for the entire population.
Can GDP show an accurate reflection of living standards if income is not distributed equally?
No. GDP can rise without widespread improvements in welfare, especially if the benefits of growth are concentrated among a few individuals or groups.
Why doesn’t GDP fully capture changes in the quality of goods and services?
GDP measures the quantity of goods and services produced, not their quality. An improvement in the quality (e.g., better technology or services) isn’t reflected in GDP figures.
How do improvements in technology affect the standard of living despite GDP figures?
Technological advances can lower the price of goods, improve quality, and make life easier, even if GDP figures may show otherwise due to price reductions.
What’s the issue with using different currencies when comparing GDP between countries?
When GDP is converted to a single currency (like USD), it ignores differences in the cost of living and local price levels, which can distort the accuracy of comparisons.
What is Purchasing Power Parity (PPP), and why is it important?
PPP adjusts for differences in the cost of living and inflation between countries, providing a more accurate comparison of living standards than simply converting GDP into a single currency.
How can defense spending affect GDP and living standards?
Defense spending boosts GDP but doesn't contribute to welfare or living standards, as it's focused on military output, not civilian goods or services.
Can a country’s GDP be high without an improvement in living standards?
Yes, especially if GDP growth is driven by factors like defense spending, natural disasters, or other non-welfare-oriented activities.
What other factors, aside from GDP, contribute to a nation’s living standards?
Education, healthcare, social services, environment quality, and access to basic needs are all important for measuring living standards, but they are not reflected in GDP.
Why are social indicators like education and healthcare important in understanding living standards?
These factors directly impact quality of life, longevity, and personal well-being, which GDP alone does not capture.
Can GDP be used to measure happiness or overall well-being?
No. GDP measures economic output, not subjective factors like happiness, mental health, or social and environmental quality.
How might GDP overstate or understate actual living standards?
Overstate: If GDP grows due to defense spending, pollution, or other non-productive uses of resources.
Understate: If GDP doesn’t account for unpaid work, informal sectors, or improvements in quality of life.
Can GDP growth indicate improvements in the standard of living?
Not always. GDP growth may not reflect improvements in living standards if it’s not accompanied by better income distribution, improved healthcare, or other quality-of-life factors.
What are the six key factors that affect national happiness according to the UN happiness report?
Real GDP per capita
Health
Life expectancy
Having someone to count on
Perceived freedom to make life choices
Freedom from corruption
Generosity
What was the purpose of the UK’s Measuring National Wellbeing report launched in 2010?
To measure how lives in the UK are improving and to track changes in national wellbeing.
What factors were found to most affect personal well-being in the UK’s National Wellbeing report?
Self-reported health, relationship status, and employment status.
How does the UK National Wellbeing report measure personal well-being?
By asking 4 key questions on life satisfaction, anxiety, happiness, and worthwhileness on a scale from 0 (not at all) to 10 (completely).
How often is the UK National Wellbeing report updated?
It is now updated quarterly, rather than annually.
What trends were observed in the UK National Wellbeing report between 2012 and 2016?
Life satisfaction, happiness, and the sense of life being worthwhile continued to rise, while anxiety levels fell but began to rise slightly toward the end of the period.
What factors may explain the slight rise in anxiety levels despite improvements in life satisfaction in the UK?
The decline in unemployment and rising GDP could explain the positive changes, but concerns over global security could be causing the increase in anxiety.
What does the Easterlin Paradox suggest about the relationship between income and happiness?
The Easterlin Paradox states that while income increases happiness at low levels (when basic needs aren't met), higher income does not lead to an increase in happiness once basic needs are satisfied.
How does income affect happiness for individuals with basic needs already met?
Once basic needs like shelter and food are met, further increases in income do not result in long-term increases in happiness.
How does social comparison affect the relationship between income and happiness?
People tend to be happier if they are wealthier than those around them. Income is linked to social status, and higher social status often leads to greater happiness.
What is the role of social status in subjective happiness?
Higher social status tends to make people happier, even if their income is the same as someone with a lower social status.
How do social networks affect our sense of happiness, based on income comparisons?
If you are the richest person in your social network, you are more likely to be happier than if you are the poorest, even if your income is the same as someone in a different network.
What is a key conclusion about happiness and income from psychological research?
Happiness increases with income when people are at low income levels (basic needs unmet), but once these needs are met, further income increases have little to no effect on happiness.
How does the happiness of richer people compare to poorer people in terms of income?
Richer people are not necessarily happier than poorer people, and further income increases do not guarantee more happiness.
What is inflation?
Inflation is the general increase in the price level of goods and services in an economy over a period, which erodes the purchasing power of money.
What is deflation?
Deflation is the fall in the general price level, indicating a slowdown in the rate of growth of output in the economy.
What is disinflation?
Disinflation is a reduction in the rate of inflation. Prices are still rising but at a slower rate.
Why is low inflation generally considered better than high inflation?
Low inflation provides price stability, promotes economic growth, and avoids uncertainty, while high inflation can erode purchasing power and savings.
How do you calculate the cost of goods after inflation?
Use the formula:
New price = Original price × (1 + inflation rate)
For example, if inflation is 10% and the price is £500, then:
£500 × 1.10 = £550.
How do you calculate the original price from a price after inflation?
Use reverse percentage calculation. For example, if a good costs £1000 after 50% inflation:
£1000 ÷ 1.50 = £666.67.
What are indices used for in inflation calculations?
Indices are used to adjust nominal figures into real figures to make accurate comparisons over time, by choosing a base year and comparing other years to it.
How do you calculate an index number for inflation?
Use the formula:
(Raw number ÷ Base raw number) × 100.
For example, if the base year is 2000 and consumer spending is 712.5 and consumer spending in 2005 was £625.1, the index for 2005 is:
(625.1 ÷ 712.5) × 100 = 87.73.
What is the Consumer Price Index (CPI)?
The CPI measures the average change in prices of a basket of goods and services over time. It is calculated by collecting prices from 20,000 shops and 141 locations.
it also calculates inflation rate by:
[CPI(current year) - CPI(last year)] / CPI(last year) x100
How is CPI calculated?
Create a Price Index
A price index (commonly the Consumer Price Index or CPI) is created by comparing the cost of the basket in the current period to the cost in a base period.
Formula for CPI:
(cost of baskets in current year / cost of basket in base year) x100
Why are some items weighted more heavily in CPI calculations?
Items are weighted based on how much of the household budget is spent on them. For example, petrol has a higher weight than postage stamps because more money is spent on petrol.
What are some limitations of the CPI?
CPI does not account for every good in the economy.It is not representative of every household’s spending habits.
It excludes housing costs, which may underestimate inflation for households with high housing expenditures.
It can’t adjust for improvements in the quality of goods and services.
Why might CPI underestimate inflation?
CPI does not include the price of housing, which has often risen more than other goods. Additionally, it doesn't capture quality improvements in goods, which can cause inflation figures to be lower than actual price increases.
What are some criticisms of inflation indices like CPI?
Some argue that indices overestimate inflation because they don’t account for quality improvements in goods and services. For example, a modern car is far more comfortable and reliable than one from the 1950s, but it costs more.
What is the Retail Price Index (RPI) and how does it differ from CPI?
The RPI is another measure of inflation, but it includes housing costs (e.g., mortgage interest payments) and has a different method for calculating housing costs compared to the CPI.
What is the base year in inflation indices?
The base year is the year against which all other years are compared. It is assigned an index value of 100. Other years’ prices are compared to this base year.
How does CPI impact policy decisions?
Policymakers use CPI to gauge the level of inflation in the economy, which affects decisions on interest rates, wages, and social security payments.
How often is CPI data updated?
CPI data is updated monthly, with prices collected from a variety of retailers and locations to ensure accuracy and reflect changing consumption patterns.
What is the Retail Price Index (RPI)?
The RPI is a measure of inflation similar to the CPI, but it includes housing costs (e.g., mortgage payments, council tax), which the CPI does not.
What are the key differences between RPI and CPI?
Housing costs: RPI includes mortgage interest payments and council tax, while CPI does not.
Substitution effect: CPI accounts for people switching to cheaper goods when prices rise, making it typically lower than RPI.
Household coverage: RPI excludes the top 4% of income earners and low-income pensioners, while CPI includes all households and income levels.
Why has the RPI been less favoured over time?
The RPI no longer holds national statistics status due to concerns over its methodology and exclusion of certain groups, although it is still calculated by the Office for National Statistics.
What is demand-pull inflation?
Demand-pull inflation occurs when an increase in aggregate demand (AD) for goods and services causes prices to rise. It happens when total demand in the economy exceeds the supply of goods and services.
How does an increase in aggregate demand (AD) cause inflation?
If factors that increase AD (such as higher consumer spending or government investment) occur, it will create pressure on prices, pushing them upwards.
What is cost-push inflation?
Cost-push inflation occurs when the supply side of the economy is affected, causing businesses’ production costs to rise. In response, businesses increase their prices to maintain profit margins, leading to inflation.
What factors cause cost-push inflation?
Cost-push inflation can occur due to increases in the costs of raw materials, wages, energy, or any other factor that reduces aggregate supply (AS).
How does an increase in the money supply contribute to inflation?
If there is too much money circulating in the economy and no increase in the supply of goods and services, demand will exceed supply, leading to higher prices (inflation).
What happens if there is more money in the economy but no increase in output?
With more money but the same quantity of goods and services, demand outstrips supply, causing prices to rise and leading to inflation.
What is the general cause of inflation?
Inflation occurs when demand exceeds supply, or when production costs increase, pushing prices up, or when there is an excessive money supply in the economy.
Why do businesses raise prices during cost-push inflation?
Businesses increase prices during cost-push inflation to cover the higher costs of production (e.g., wages, materials), which helps them maintain their profit margins.
How can government actions increase the money supply?
The government can increase the money supply by printing more money and increasing government borrowing.
What happens if people's incomes do not rise with inflation?
If incomes don’t rise with inflation, people will have less purchasing power, which can lead to a decline in living standards.
How does inflation affect people in debt?
People in debt benefit from inflation because they can pay off their debt with money that is worth less. However, those who are owed money lose out because the money they receive is of lesser value.
How does inflation affect consumers’ savings?
Inflation erodes the value of savings, meaning money saved today will be worth less in the future, which disadvantages savers
How does inflation impact consumer psychology?
Rising prices can make consumers feel poorer, even if their incomes rise with inflation, leading to reduced spending and lower consumer confidence
How does inflation affect firms' competitiveness?
If inflation is higher in Britain compared to other countries, British goods become more expensive and less competitive internationally, making exports harder to sell.
Why is deflation bad for businesses?
Deflation encourages people to delay purchases, save more, and avoid borrowing. This reduces demand for goods, lowers firms' profits, and causes businesses to become less willing to invest.
What challenges do firms face due to inflation or deflation?
Inflation, deflation, and disinflation are difficult to predict, making it hard for firms to plan for the future. Additionally, businesses must regularly update prices, which can be costly.
How does inflation affect government revenue?
If the government doesn’t adjust excise taxes to account for inflation, real tax revenue falls. If they don’t adjust income tax allowances, government income increases, but taxpayers may have less money.
How does inflation impact workers' living standards?
Workers who do not receive pay rises in line with inflation will experience a decrease in their living standards. This is especially true for those in weaker unions, who struggle to secure wage increases.
How can deflation affect jobs?
In a deflationary environment, businesses may experience falling profits, which can lead to job cuts and higher unemployment rates.
What is indexation?
Indexation is when wages or taxes are adjusted to keep up with inflation, often through agreements that link increases in wages to the CPI or RPI.
What problems can arise from indexation?
Indexation can fuel further inflation because if wages keep rising with inflation, it perpetuates the inflationary cycle, even if the government is trying to reduce inflation.
What is the synoptic link between inflation and micro/macro economics?
Inflation itself is a macroeconomic concept, but its effects on individuals, firms, and workers (like wages, prices, and profits) are microeconomic impacts. This shows how macroeconomic changes affect microeconomic agents.
What does unemployment represent in an economy?
Unemployment represents a waste of resources and is a key indicator of a country's economic health. High unemployment often correlates with slower economic growth.
What is the Claimant Count?
The Claimant Count measures the number of people receiving benefits for being unemployed. It tracks how many people are receiving unemployment benefits on a specific day each month.
How does the ILO define unemployment and employment?
Employed: People doing more than 1 hour of paid work a week, on holiday, in training, or working 15+ hours unpaid in a family business.
Unemployed: Those seeking work, without a job, able to work, and available to start within 2 weeks.
Inactive: People not seeking work, including students, retirees, and discouraged workers.
What is the Labour Force Survey (LFS)?
The LFS is a sample survey used to measure employment, unemployment, and inactivity. It asks people about their personal circumstances and labour market activity to classify them according to the ILO definitions.
How do the Claimant Count and LFS differ?
The Claimant Count tracks benefit claimants and may miss people working in the hidden economy or fraudulently claiming benefits.
The LFS includes people not eligible for benefits but still considered unemployed (e.g., those looking for work while studying or those above pension age).
What are “hidden unemployed”?
Work part-time but want full-time work.
Are on government training schemes but prefer employment.
Are classified as sick or disabled but want a job.
Are in education or not actively seeking a job but would take one if offered.
What are the different unemployment rates?
Employment Rate: Percentage of working-age population that is employed.
Unemployment Rate: Percentage of the economically active population that is unemployed.
Activity (Participation) Rate: Percentage of working-age population that is economically active.
Inactivity Rate: Percentage of working-age population that is inactive (not in the labour market).