2 Measurements of Income and Well Being

Question 1

GDP

Answer 1

Measures the total income of everyone in the economy. It is the market value of all final goods and services produced within a country in a given time period.

Question 2

What does GDP not include?

Answer 2

Illegal production of goods snd intermediate goods

Question 3

What are the components of GDP?

Answer 3

Consumption
Investment
Government purchases
Net exports

Question 4

Consumption

Answer 4

Spending by households on goods and services. Housing not included

Question 5

Investment

Answer 5

Spending on capital equipment and structures, doesn’t include stocks and bonds. Includes inventory accumulation

Question 6

Government purchases

Answer 6

Government consumption expenditure and gross investment. Doesn’t include transfer payments as they don’t increase income, only redistribute it

Question 7

Net exports

Answer 7

Exports- imports

Question 8

What % does each component make up of GDP?

Answer 8

Consumption 66%
Investment 15%
Government purchases 20%
Net exports -4%

Question 9

GNP

Answer 9

The total income earned by UK nationals, so includes UK citizens that earn abroad and excludes income earned by foreigners in the UK

Question 10

NNP

Answer 10

GNP minus depreciation

Question 11

Normal GDP

Answer 11

The production of goods and services valued at current prices

Question 12

Real GDP

Answer 12

Production of goods and services valued at constant prices of a given base year

Question 13

GDP deflator

Answer 13

A way of measuring inflation

Nominal GDP/ real GDP x100

Question 14

Inflation

Answer 14

Measure the rise in an economy’s overall price level

Question 15

What are the limitations of real GDP per capita as a measure of well being within a country?

Answer 15

Leisure isn’t included
Activity outside of markets isn’t included
Quality of environment isn’t included
Doesn’t factor in distribution of income

Question 16

CPI

Answer 16

Consumer price index. Measures overall price level of goods and services bought by consumers by computing the cost of a fixed basket of goods in different years

Question 17

How is the CPI basket weighted?

Answer 17

The goods which are bought most are weighted more heavily

Question 18

PPI

Answer 18

Producer price index. Measure if the cost of a basket of goods and services bought by firms

Question 19

How are PPI and CPI linked?

Answer 19

Changed in PPI are thought to predict changes in CPI

Question 20

Problems with CPI

Answer 20

1. Substitution bias- people will substitute towards goods that have come relatively cheaper so the sighting changes.
2. Introduction of new goods- hard to account for new goods, basket lags
3. Unmeasured quality change- when goods are updated they become more expensive (new iPhone) this is hard to account for
4. Doesn’t consider distribution of how people’s baskets look

Question 21

RPI

Answer 21

CPI but includes council tax and mortgage interest payments

Question 22

Indexation

Answer 22

The automatic correction of a £ for the effects of rises in the cost of living