2-1 Measures of economic performance Flashcards
When does economic growth occur?
- When there is a rise is GDP
What is GDP?
- Measures the quantity of goods and services produced in an economy
What is real GDP?
- GDP adjusted for inflation
What is nominal GDP?
- GDP not adjusted for inflation
What is total GDP?
- Combined monetary value of all goods and services produced within a country’s borders over a given time period
What is GDP per capita?
- The value of total GDP divided by the total population of a country
What is GNP?
- The market value of all products produced in an annum by the labour and property supplied by the citizens of one country
What is GNI?
- The sum of value added by all producers who reside in a nation, plus net overseas interest payments and dividends.
What is purchasing power parity?
- Theory that estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent, according to each currency’s purchasing power
What are the limitations of using GDP to compare living standards?
- GDP does not give an indication of distribution of income
- GDP does not account for purchasing power
- GDP does not account for hidden economies
- GDP does not account for welfare
What is inflation?
- The sustained rise in the general price level over time.
What is deflation?
- The sustained fall in the general price level over time.
What is disinflation?
- A fall in the rate of inflation.
What is Consumer Price Index?
- Used to calculate inflation
- Family expenditure survey used
- Weighted basket of goods
- Measures average price change of goods
- Updated annually
- Uses a base year
What are the limitations of CPI when measuring inflation?
- Basket of goods is only representative of the average household.
- Different demographics have different spending patterns
- CPI is slow to respond to new goods and services.
What is the Retail Price Index?
- Alternative measure of inflation
- RPI includes housing costs.
- Excludes top 4 percent and bottom 4 percent of earners.
What are the limitations of RPI?
- RPI does not consider the fact that when prices rise, people will switch to a substitute good.
What are the causes of inflation?
- Demand Pull
- Cost Push
What is demand-pull inflation?
- Increased demand with limited supply so producers increase prices.
What are the triggers of demand-pull inflation?
- Depreciation in the exchange rate.
- Lower taxes or increased government spending
- Lower interest rates
- High growth
What is cost-push inflation?
- Occurs when firms face rising costs
What are the triggers of cost-push inflation?
- Increase in raw materials costs.
- Expectations of inflation
- Indirect taxes
- Depreciation in the exchange rate
- Monopolies
What are the effects of inflation on consumers?
- Low and fixed incomes are hardest hit by inflation.
- Value of loans will fall
What are the effects of inflation on firms?
- Investing is more attractive as lower interest rates.
- Workers might demand higher wages.
- Firms may be less price competitive on a global scale.
- Unpredictable inflation will reduce business confidence.