2.1 Measures Of Economic Growth Flashcards
When does economic growth occur ?
Economic growth occurs when there is a rise in the value of Gross Domestic Product (GDP).
Define GDP
GDP measures the quantity of goods and services produced in an economy
Economic growth leads to..
- higher living standard
- more employment opportunities
Real GDP
Real GDP is the value of GDP adjusted for inflation
Nominal GDP
Nominal GDP is the value of GDP without being adjusted for inflation
Total GDP
Total GDP is the combined monetary value of all goods and services produced within a country’s borders during a specific time period
GDP per capita
GDP per capita is the value of total GDP divided by the population of the country.
How can national happiness be measured ?
1- gross national product
2- gross national income
GNP
estimate of the total value of all the final products and services turned out in a given period by the means of production owned by a country’s residents.
GNI
the total amount of money earned by a nation’s people and businesses.
The number includes the nation’s gross domestic product (GDP) plus the income it receives from overseas sources
Purchasing Power Parity
estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent
Limitation of GDP to compare living standards
- GDP does not give any indication of the distribution of income
- GDP may need to be recalculated in terms of purchasing power, so that it can account for international price differences
- large hidden economies, such as the black market, which are not accounted for in GDP
- GDP gives no indication of welfare. Other measures, such as the happiness index, might be used to compare living standards
UK national well-being
report includes questions about life satisfaction, anxiety, happiness and worthwhileness
relationship between real incomes and subjective happiness
- economy grew by 5% in GDP per capita between 2007 and 2014, but showed no change in life satisfaction
- higher the GDP per capita, the higher the average life satisfaction score
Inflation
Inflation is the sustained rise in the general price level over time
What does inflation cause ?
cost of living increases and the purchasing power of money decreases
Deflation
Disinflation
Disinflation is the falling rate of inflation
How to calculate inflation rate
Consumer Prices Index (CPI)
CPI
o A survey is used
o Weighted basket of goods
o Measures average price change of the goods
o Updated annually
macroeconomic objective for inflation
macroeconomic objective for inflation to be at 2%
Limitation of CPI
- only representative of the average household, so it is not accurate for households who do not own cars
- CPI is slow to respond to new goods and services, even though it is updated regularly.
Alternative use of CPI
Retail Price Index (RPI)
Retail Price Index (RPI)
- includes housing costs, such as payments on mortgage interest and council tax
What does CPI take account that RPI doesn’t
CPI takes into account the fact that when prices rise people will switch to product that has gone up by less, whilst RPI does not.
2 main Causes of inflation
- demand pull
- cost push
Demand pull
- when AD increase
- pressure on resource
- producers increase their price and earn more profit
Tiggers of demand pull inflation
- depreciation in the exchange rate, which causes imports to become
more expensive, whilst exports become cheaper. This causes AD to
rise. - Fiscal stimulus in the form of lower taxes or more government
spending. This means consumers have more disposable income, so
consumer spending increases. - Lower interest rates makes saving less attractive and borrowing more
attractive, so consumer spending increases.
Cost push
- from the supply side
- occurs when firms face rising costs
What triggers cost push
- Raw materials become more expensive
- Labour becomes more expensive
- Expectations of inflation- if consumers expect prices to rise, they may ask for higher wages to make up for this, and this could trigger more inflation.
- Depreciation in the exchange rate, which causes imports to become more expensive, which pushes up the price of raw materials
- Monopolies, using their dominant market position to exploit
consumers with high prices.
Inflation effect in consumers
- low and fixed incomes are hit hardest by inflation, due to its regressive effect, because the cost of necessities such as food and water becomes expensive
Inflation effect on firms
- high inflation, interest rates are likely to be higher = cost of investing will be higher and firms are less likely to invest.
- Workers might demand higher wages, which could increase the costs of production for firms
- Unpredictable inflation will reduce business confidence - less investment
Inflation effect on government
will have to increase the value of the state pension
and welfare payments because the cost of living is increasing
Balance of payment
record of all financial transactions made between consumers, firms and the government from one country with other countries.
Exports
Exports are goods and services sold to foreign countries, and are positive in the
balance of payments. This is because they are an inflow of money.
Imports
Imports are goods and services bought from foreign countries, and they are negative
on the balance of payments. They are an outflow of money.
Balance of payment is made up off…
Current account
Surplus
More exports than imports
+
Deficit
Imports more than exports
-
Macro objective
o Full employment
o Low, stable inflation
o A sustainable current account on the balance of payments o Sustainable economic growth
