Theme 2.1 (Measure of economic performance)

What is GDP

Gross Domestic Product (output of economy)

Define GDP

The value of all goods and services produced in an economy in a 1 year period

What are the two approaches of measuring GDP

Expenditure approach

-e.g value of consumption , government spending , investments by firms and net exports

Income approach

-e.g wages from labour , rents from land , interest from capital and profit from entrepreneurship

Why do expenditure and income approach both give same figure

One party's expenditure is another party's income

What is the difference between value of GDP and volume of GDP

Value = monetary worth

Volume = Physical number

What does nominal mean in economics

a metric not adjusted for inflation

Define Nominal GDP

The actual value of all goods and services produced in an economy not adjusted for inflation

Define Real GDP

the value of all goods and services produced in an economy adjusted for inflation

What is an example of real GDP

If the economy grew by 4% since last year, but inflation was 2%, real economic growth was 2%

Disadvantage of Nominal GDP

may make GDP appear higher than it is

What is the volume of GDP

GDP adjusted for inflation, It is the size of the basket of goods and the real level of GDP

What is the value of GDP

The monetary value of GDP , It is the nominal figure and can be calculated by

-volume x current price level

What is GDP per capita

GDP divided by the population

What is GDP per capita head

mean wealth of each citizen in a country

When exam question says "at constant prices" what GDP is it referring to

Real GDP

What does GNI include that GDP doesn't

income earned by citizens whilst operating outside of the country

Does GDP include value of production outside its countries borders

No

Define GNI

-Gross national income

The value of goods and services earned by a country including overseas earnings

What is GNP

GDP + income from abroad minus income earned by foreign residents

What is more accurate GNP/capita or GDP/capita

GNP/capita

Why is real GDP better for comparison then nominal GDP

One country may have a a higher rate of economic growth but a higher rate of inflation

-Real GDP provides better comparison

Why is using real GDP / per capita more accurate then real GDP

takes into account population differences

What does PPP mean

Purchasing Power Parities

What does PPP show

the purchasing power of different countries

-shows the number of units a country's currency required to buy a product in the local economy

What is the aim of PPP

to make more accurate standard of living comparisons between countries when goods/services cost different amounts

What are the limitations of using GDP to compare living standards over time

1. GDP does not give any indication on the distribution of income

2. GDP gives no indication of welfare such as the happiness index

3. GDP needs to be recalculated in terms of PPP

4. There may be hidden economies like the black market

Who measures national happiness and social well-being in UK

the Office for National Statistics (ONS)

What are factors that affect national well being

1.Real GDP per capita

2.Health

3.Life-expectancy

4. Perceived freedom to make life choices

5. Freedom from corruption

What is the link between happiness and income

Happiness and income have a direct relationship up to a point once basic needs are met where higher income doesn't lead to increased happiness

What is inflation

The sustained increase in general price levels of goods/services in an economy

What is deflation

a continuing fall in the general price level of goods/services

negative (-) rate of inflation

What is disinflation

a fall in the rate of inflation but not sufficient enough to bring about deflation

(prices rising at a slower rate)

What is purchasing power

Value of a currency expressed in terms of the number of goods/services that 1 unit of money can buy

What is the UK's target inflation rate

2% (+ or - 1%)

What are the two measures of inflation in the UK

1. Consumer price index (CPI)

2. Retail price index (RPI)

What is the CPI

-a measure of household expenditure indicated by a 'basket of goods'

-goods are weighted according to the proportion of household spending

e.g petrol has a higher weighting than tea

What are the 4 key points of CPI

1. A survey is used

2. A weighted basket of goods

3. Measures average price change of the goods

4. Updated annually

What is the CPI equation

cost of basket in year X / cost of basket in base year x 100

What are the limitations of CPI

- the CPI only represents the average household therefore will be unrepresentative of non-typical households

- some goods and services are non-applicable to certain households e.g those who don't have a car

- different demographic = different spending pattern

- certain costs may vary with different people e.g. housing prices

What is the retail price index

A measure of inflation that includes housing costs such as mortgage interest , council tax

Tends to be a higher value than CPI

What are the two causes of inflation

1. Demand pull

2. Cost Push

What is demand pull inflation

-Demand side of economy

-When AD is growing unsustainably and there is pressure on resources

-Producers increase prices and earn more profits

When does Demand pull inflation usually occur

When resources are fully employed

What are the main triggers of demand pull inflation

-Depreciation in exchange rate , imports become more expensive , exports become cheaper , causes AD to rise

-Fiscal stimulus = lower taxes and more government spending , so consumers have more disposable income so consumer spending increases

-Lower interest rates so saving less attractive and borrowing more attractive so consumer spending increases

-High growth in Uk export markets so UK exports increase and AD rises

What is cost push inflation

A rise in the general price level resulting from an increase in the cost of production

What is cost push inflation related to

Supply side of economy

What are the causes of Cost push inflation

- Rise in price of raw materials

- Increase in labour costs

-Expectations of inflation (consumers expect prices to rise so demand higher wages triggering inflation)

- Increase in indirect taxes

-Depreciation in exchange rate (imports more expensive pushes price of raw materials up)

-Monopolies exploiting consumers with higher prices

What are the effects of inflation on Firms

-high inflation , interest rates are likely to be high so cost of investing will be higher so less likely to invest

-workers may demand higher wages so cost of labour increases

-Uncertainty will reduce business confidence

-Less price competitive on global scale

What are the effects of inflation of Consumers

-decrease in purchasing power

-decrease in the real value of savings (money worth less in real terms)

-Fall in real incomes for those on fixed income/ pensions

What are the effects of inflation of governments

-increase in welfare payments as cost of living increases

-inflation erodes international competitiveness of export industries

-trade offs in tackling inflation

What are the effects on inflation on workers

- real income falls with inflation , so workers have less disposable income

- If firms face higher cost there could be more redundancies

- If wages don't increase in relation to inflation motivation and productivity may be lost

What is unemployment

When someone is willing and able to work and is seeking work but does not have a paid job

What is labour force and non-labour force

LABOUR FORCE

-all those actively working or seeking work (ages 16-64)

NON-LABOUR FORCE

-all those not seeking work

What is economically inactive

These are people of working age who are not actively seeking employment

e.g , students, stay-at-home parents, retired people

What is underemployment

People working at jobs below their level of skills

What are the two measures of unemployment

1. Claimant Count

2. International labour organisation (ILO) + Uk Labour force survey (LFS)

What is the Claimant Count

the number of people claiming unemployment benefits such as job seekers allowance

Is every unemployed person eligible for job seekers allowance

No , for example they may have a partner on high income

What is the criteria of Labour force survey for unemployment

1. Been out out of work for 4 weeks

2. Able and willing to start work within 2 weeks

3. Workers should be available for 1 hour per week

Effects of unemployment rates on consumers

-if consumers are unemployed they have less disposable income so standard of living may fall

-physiological effects of losing a job

Effects of unemployment on Firms

- higher rates of unemployment means larger supply of labour to employ from

-higher rates of unemployment means consumers have less disposable income so consumer spending falls , so firms loose profits

-producers selling inferior goods may see a rise in sales

Effects of unemployment on Workers

-waste of workers resources , long-term unemployment can reduce skills set

-fall in wages as supply of labour increases , loss of income

-mental and physical illness

Effects of unemployment on government

- more money spent on JSA and benefits , incurs an opportunity cost as money could be spent elsewhere

-less income tax revenue + less revenue from indirect taxes on expenditure as less disposable income

Effects of employment on economy (social)

-increase crime , vandalism

-increased homelessness

-increased anti social behaviour

-loss of output and productivity

What are the 5 causes of unemployment

1. Structural

2. Frictional

3. Cyclical

4. Seasonal

5. Classical / real wage inflexibility

What is structural unemployment

-Occurs with a long term decline in demand for goods and services in an industry

-Workers don't have the transferable skills to move to another industry

What is an example of structural unemployment

decline in secondary sector and a growth in tertiary sector

What is frictional unemployment

Occurs when workers are between jobs

-usually short term unemployment

-workers have voluntarily left previous jobs to seek another

What is cyclical unemployment

Caused by a fall in AD in an economy

-typically happens during a slow down or recession , firms may be forced to close or make workers redundant

What is seasonal unemployment

Occurs as certain seasons come to an end and labour is not required until the next season

What is classical/ real wage inflexibility

When fixing wages above the equilibrium rate (minimum wage) can result in the supply of labour being more than the demand for labour

-As a result there is an excess supply of labour (real wage unemployment)

What is the significance of migration on employment

-immigrants fill vacancies that local citizens can't or won't fill (e.g manual labour , low skilled , dangerous job)

-increased supply of labour may push down wages form low skilled jobs

-lower average wages are an incentive for employers to hire more workers

-employment may increase

-increased population which increases consumption in an economy

What is the significance of migration on unemployment

-immigrants may displace local workers increasing level of unemployment

What is the balance of payments

a record of all the financial transactions that occur between a country and the rest of the word

What are two main sections of BoP

1. Current account

2. financial and capital account

What is the current account

all transactions related to goods/services along with payments related to the transfer of income

What is the financial and capital account

all transactions related to savings investment and currency stabilisation

Why is it called the balance of payments

as the current account should balance with the capital/financial account and = 0

What is money in and out of a country recorded as

Money flowing in = a credit (+)

Money flowing out = a debt (-)

What does the current account record

net income that an economy gains from international transactions

What are exports and there value

goods and services sold to foreign countries

(+) positive value of BoP as inflow of money

What are imports and there value

goods and services bought from foreign countries

(-) negative value of BoP as outflow of money

What are visible exports and imports

Goods

What are invisible exports and imports

Services

What are the components of current account

-Trade in goods (visible)

-Trade in services (invisible)

When does a current account deficit occur

-when the value of outflows is greater than the value of inflows

-imports > exports

When does a current account surplus occur

-when value of the outflows is greater than values of inflows

-imports < exports

How does a current account deficit effect AD

-Net exports are a component of AD

-If net exports are negative then AD decreases

How do governments correct current account deficits

Raise tariffs

-decrease imports bought by households

-firms who rely on imports for raw materials now have higher costs of production which may be passed to consumers via higher prices

-reducing current account comes at the expense of increased inflation in the economy = a trade off