Measures of econ performance/balance of payments/GDP evaluation/inflation

What is economic growth?

An increase in real GDP over a period of time.

What is real GDP?

The total value of output produced in an economy, adjusted for inflation.

What is GDP per capita?

Real GDP divided by the population.

Why is GDP per capita generally better than total GDP for comparing living standards?

It accounts for population size, so it gives a better indication of average material living standards than total GDP alone.

What is inflation?

A sustained rise in the general or average price level of an economy over time.

How is inflation measured in the UK?

Using the Consumer Price Index (CPI), which tracks changes in the prices of a weighted basket of goods and services.

What is deflation?

A sustained fall in the general price level.

What is disinflation?

A fall in the rate of inflation. Prices are still rising, but at a slower rate.

What is the claimant count?

The number of people claiming unemployment-related benefits.

What is a limitation of the claimant count?

It is a relatively narrow measure and can understate the true level of unemployment.

What is the ILO/Labour Force Survey measure of unemployment?

A survey-based measure which counts people who are out of work, actively seeking work and available to start work.

Why may the ILO/LFS measure be preferable to the claimant count?

It uses an internationally standard definition and is generally considered more accurate and internationally comparable.

What is frictional unemployment?

Short-term unemployment while a person is between jobs or searching for work.

What is structural unemployment?

Unemployment caused by long-term changes in industries or an occupational or geographical mismatch between workers and available jobs.

What is cyclical or demand-deficient unemployment?

Unemployment caused by a fall in aggregate demand during an economic downturn or recession.

What is seasonal unemployment?

Unemployment that changes predictably according to the season, for example in tourism or agriculture.

What is the balance of payments current account?

A record of a country's transactions with the rest of the world involving trade in goods, trade in services, primary income and secondary income.

What are the four components of the current account?

Trade in goods, trade in services, primary income and secondary income.

What is trade in goods?

Visible exports of physical goods minus visible imports of physical goods.

What is trade in services?

Invisible exports of services minus invisible imports of services.

What is primary income?

Net income from investments, such as dividends and interest received from abroad minus those paid abroad.

What is secondary income?

Net transfers between countries, such as remittances and foreign aid.

What is a current account deficit?

When the value of debits such as imports and income or transfers paid abroad exceeds credits such as exports and income or transfers received from abroad.

Why can rising real GDP indicate improving living standards?

A larger national income generally allows greater consumption of goods and services, potentially improving access to healthcare, education and consumer goods.

Why is income distribution a limitation of GDP as a measure of living standards?

A rise in GDP or GDP per capita may be concentrated among a small proportion of the population, so most people's living standards may not improve.

Why are non-material factors a limitation of GDP?

GDP does not account fully for factors such as pollution, working hours, leisure or unpaid work, even though these affect quality of life.

What is one broader alternative to GDP for measuring living standards?

The Human Development Index (HDI), which combines income per capita with measures of education and life expectancy.

Evaluate real GDP as a measure of living standards.

Real GDP rising can indicate greater incomes and consumption possibilities. However, GDP ignores income distribution and many non-material aspects of welfare such as pollution, leisure and unpaid work. GDP per capita and broader measures such as HDI can therefore provide additional information.

What is demand-pull inflation?

Inflation caused when aggregate demand grows faster than aggregate supply, creating excess demand and upward pressure on the general price level.

Give a chain of analysis for demand-pull inflation.

AD rises → spare capacity falls → demand increasingly exceeds available output → firms face stronger demand and bottlenecks → general price level rises.

What is cost-push inflation?

Inflation caused by an increase in firms' costs of production, which shifts SRAS to the left and raises the price level.

Give a chain of analysis for cost-push inflation.

Production costs rise → firms become less willing or able to supply at each price level → SRAS shifts left → real output falls and the price level rises.

How can a depreciation cause cost-push inflation?

Exchange rate depreciates → imported raw materials and components become more expensive → firms' production costs rise → SRAS shifts left → price level rises.

Why is the distinction between demand-pull and cost-push inflation important?

The appropriate policy response differs. Reducing AD can control demand-pull inflation, but doing the same against cost-push inflation may reduce growth and increase unemployment without solving the original cost pressure.

What is stagflation?

A situation involving inflation alongside weak or falling economic growth and rising or high unemployment.

What is the difference between nominal and real GDP?

Nominal GDP is measured at current prices and is not adjusted for inflation, whereas real GDP is adjusted for changes in the price level.

How do you calculate GDP per capita?

Real GDP ÷ population.