2.1 Measures Of Economic Growth

Question 1

When does economic growth occur ?

Answer 1

Economic growth occurs when there is a rise in the value of Gross Domestic Product (GDP).

Question 2

Define GDP

Answer 2

GDP measures the quantity of goods and services produced in an economy

Question 3

Economic growth leads to..

Answer 3

• higher living standard

- more employment opportunities

Question 4

Real GDP

Answer 4

Real GDP is the value of GDP adjusted for inflation

Question 5

Nominal GDP

Answer 5

Nominal GDP is the value of GDP without being adjusted for inflation

Question 6

Total GDP

Answer 6

Total GDP is the combined monetary value of all goods and services produced within a country’s borders during a specific time period

Question 7

GDP per capita

Answer 7

GDP per capita is the value of total GDP divided by the population of the country.

Question 8

How can national happiness be measured ?

Answer 8

1- gross national product

2- gross national income

Question 9

GNP

Answer 9

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.

Question 10

GNI

Answer 10

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

Question 11

Purchasing Power Parity

Answer 11

estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent

Question 12

Limitation of GDP to compare living standards

Answer 12

• 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

Question 13

UK national well-being

Answer 13

report includes questions about life satisfaction, anxiety, happiness and worthwhileness

Question 14

relationship between real incomes and subjective happiness

Answer 14

• 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

Question 15

Inflation

Answer 15

Inflation is the sustained rise in the general price level over time

Question 16

What does inflation cause ?

Answer 16

cost of living increases and the purchasing power of money decreases

Question 17

Deflation

Question 18

Disinflation

Answer 18

Disinflation is the falling rate of inflation

Question 19

How to calculate inflation rate

Answer 19

Consumer Prices Index (CPI)

Question 20

CPI

Answer 20

o A survey is used
o Weighted basket of goods
o Measures average price change of the goods
o Updated annually

Question 21

macroeconomic objective for inflation

Answer 21

macroeconomic objective for inflation to be at 2%

Question 22

Limitation of CPI

Answer 22

• 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.

Question 23

Alternative use of CPI

Answer 23

Retail Price Index (RPI)

Question 24

Retail Price Index (RPI)

Answer 24

• includes housing costs, such as payments on mortgage interest and council tax

Question 25

What does CPI take account that RPI doesn’t

Answer 25

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.

Question 26

2 main Causes of inflation

Answer 26

- demand pull | - cost push

Question 27

Demand pull

Answer 27

- when AD increase - pressure on resource - producers increase their price and earn more profit

Question 28

Tiggers of demand pull inflation

Answer 28

- 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.

Question 29

Cost push

Answer 29

- from the supply side | - occurs when firms face rising costs

Question 30

What triggers cost push

Answer 30

- 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.

Question 31

Inflation effect in consumers

Answer 31

- 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

Question 32

Inflation effect on firms

Answer 32

- 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

Question 33

Inflation effect on government

Answer 33

will have to increase the value of the state pension | and welfare payments because the cost of living is increasing

Question 34

Balance of payment

Answer 34

record of all financial transactions made between consumers, firms and the government from one country with other countries.

Question 35

Exports

Answer 35

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.

Question 36

Imports

Answer 36

Imports are goods and services bought from foreign countries, and they are negative on the balance of payments. They are an outflow of money.

Question 37

Balance of payment is made up off…

Answer 37

Current account

Question 38

Surplus

Answer 38

More exports than imports | +

Question 39

Deficit

Answer 39

Imports more than exports | -

Question 40

Macro objective

Answer 40

o Full employment o Low, stable inflation o A sustainable current account on the balance of payments o Sustainable economic growth