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Macro Economics > 2.1 Measures of Economic Performance > Flashcards

2.1 Measures of Economic Performance Flashcards

1
Q

What is meant by positive statements ?

A
  • statements which can be proved by info and statistics

eg. Inflation is at 10.1%

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2
Q

What is meant by normative statements ?

A
  • statements which are opinions/value judgements (they are subjective)

eg. the govts main objective should be to decrease inflation

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3
Q

What is GDP ?

A
  • the market value of all final goods and services produced domestically in a time period (either a year or a quarter)
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4
Q

What are the three methods of measuring GDP ?

A
  • output measure: value of goods/services produced by all sectors of the economy
  • income measure: value of profits and wages
  • expenditure measure: value of goods/services purchased by household, govt & businesses ➡️ C + I + G + (X - M)
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5
Q

Why is GDP important ?

A
  • helps economists determine the health of the economy + is used to set interest rates and tax ➡️ it attempts to capture the sate of the economy in one number
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6
Q

Why do GDP figures get revised ?

A
  • revised every three months because it gives economists/govts a more accurate reading
  • number that the ‘flash’ estimate which is quicker but only uses 40% of data and so as more data comes in the number is revised and adjusted
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7
Q

What is the formula for measuring GDP ?

A

GDP= C+I+G+X-M

C- consumption
I- investment (stock and equipment) (fixed investments & inventories)
G- government
X-M - net exports (exports-imports)

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8
Q

What is gross national income ?

A
  • another measure of an economy
  • GDP plus what a country earns from overseas investments & subtracts what foreigners earn in a country and send back home (net property income from overseas)
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9
Q

What are the impacts of increased GDP ?

A
  • increase jobs
  • increase prices (inflation)
  • increase international trade
  • increase standards of living
  • increase ££ for govt so increases public services
  • damages the environment
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10
Q

What is meant by the circular flow of income ?

A

🔔 basic way of understanding how different parts of the economic system fit together ➡️ income=output=expenditure

  • the circular flow of income shows connections between different sectors of our economic system ➡️ it revolves around flows of goods/services and factors of production between firms and households
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11
Q

What are the 4 parts of the circular flow explained ?

A
  • households: receive income from jobs allowing them to either consume or save
  • firms: meet consumer demands through output, pay wages to households and make investments to expand
  • government: collects taxes from households & firms + govt spending
  • external sector: UK buys imports and sells UK products abroad (exports)
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12
Q

What are the leakages and injections in the circular flow of income ?

A

Leakages:
- savings
- taxation
- imports

Injections:
- government spending
- exports
- investment

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13
Q

What happens if injections are greater than leakages ? (and vice versa)

A
  • injections > ➡️ the economy and GDP will increase
  • leakages > ➡️ economy and GDP shrink/decrease
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14
Q

What is GDP per capita and its formula ?

A
  • the total GDP of a country/total population
  • used to estimate living standards for people in a country

GDP per capita= total GDP/population

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15
Q

What is meant by Real GDP ?

A
  • a measure of a country’s GDP that has been adjusted for inflation
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16
Q

What is meant by Nominal GDP ?

A
  • GDP not adjusted to inflation
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17
Q

What is meant by Purchasing Power Parity (PPP) ?

A
  • a exchange rate ➡️ the rate at which the currency of one country would have to convert into that of another country to buy the same amount of goods and services in each country
  • much better indication of living standards than GNI alone
18
Q

How useful is GDP to measure living standards ?

A
  • an approximate measure of living standards
  • ✅ growth in GDP is seen as indicating a healthy economy ie. increase in living standards
  • ✅ easy to make comparisons over time
  • ✅ easy to compare different countries
  • ✅ higher income generally correlates w/being able to buy more goods/services eg. education
  • ❌ only measures the average + ignores inequality
  • ❌ does not account for damage to the environment
19
Q

Define economic growth ?

A
  • an increase in real GDP from one year to another
20
Q

What are the limitations of GDP when measuring living standards ?

A
  • the black market: money earned from illicit activities + any unreported income of workers attempting to avoid tax
  • non market activities: only counts goods passed through official markets where there is a set price ➡️ misses home production and voluntary work eg. caring for relatives or volunteering
  • environmental factor: poor at recognising environmental costs eg. pollution
  • happiness: makes no adjustments for happiness ➡️ should take into account stress ect as happiness is determined by many other things that goods and services
  • sustainability: does not take into account sustainability of growth ➡️ short term economic growth may be bcs of over exploitation of scarce resources (limiting growth in the future)
  • balance of GDP/inequality: does not take into account inequality + spending composition of GDP (different in every country) ➡️ hard to compare
21
Q

What are other factors that can be used to measure wellbeing ?

A

Economic:
- income (GDP)
- economic stability eg. inflation
- employment

Investment:
- health
- education
- infrastructure

Sustainability:
- income equality
- civil society
- government
- environment

22
Q

What did the UK Well-being survey ask people to measure national wellbeing ?

A
  • how satisfied are up you with life ?
  • to what extent do you feel the things you do in your life are worthwhile ?
  • how happy did the feel yesterday?
  • how anxious did you feel yesterday ?
23
Q

What is meant by inflation ?

A
  • when the average price of goods and services is rising over a period of time
24
Q

What is deflation ?

A
  • ‘negative inflation’ ie. when average prices are falling overtime
25
Q

What is disinflation ?

A
  • occurs when inflation is slowing down ➡️ prices are still rising but at slower rate
26
Q

What are the causes of inflation ?

A
  • less output/overconsumption - shortages of goods etc in the country
  • too much money in the economy eg. printing more money
  • prices of something important increasing eg. oil or energy
  • falling exchange rate - imports = £££
27
Q

What impacts does inflation have ?

A
  • more industrial/political unrest eg. strikes
  • slows the economy as people don’t have standing power
  • living standards fall (people suffer)
  • economy’s less competitive
28
Q

How does the Bank of England try to control inflation ?

A

🔔 Bank of England have a target of 2% inflation

  • borrow/take money from banks (control amount of money in circulation)
  • change interest rates
29
Q

What is CPI ?

A
  • consumer price index
  • the govt measures inflation by tracking/weighing the price of a typical basket of goods every month (the price of 600 different goods are measured)
30
Q

How is CPI measured ?

A
  • carry out household expenditure survey ➡️ a typical basket of goods
  • each month govt collects price quotations in 141 locations of around 600 products
  • changes in prices are weighed according to their importance in our spending eg. electricity gets greater weight than price of avocados
  • CPI is the calculated
31
Q

What are the limitations of CPI ?

A
  1. not representative of everyone: people have diff spending habits and so inaccurate for ‘non-typical households’
  2. new products: CPI is slow to respond to new products so takes a while to be added to the basket
  3. changing quality of goods/services: price may increase BUT could be accompanied by an increase of quality
  4. Doesn’t account for regional differences in the cost of living
32
Q

What are the other measures of inflation ?

A

3 main estimates produced by the ONS:
- CPI ➡️ consumer price index
- CPIH ➡️ consumer price index including housing costs (a new measure but difficult to measure accurately)
- RPI ➡️ retail price index (older measure of inflation)

33
Q

What is meant by demand pull Inflation ?

A
  • cause by excess AD
  • increase in demand but supply stays the same ➡️ (C+I+G+X-M⇒ increasing)
  • often linked to a credit boom
  • economy close to full capacity
34
Q

What is meant by cost push Inflation ?

A
  • 🔔 occurs when cost of production increases making goods more expensive to make

eg.
- rising wage costs in labour market
- increase raw material & components costs
- increase in indirect taxes eg. VAT
- rising import prices due to a falling exchange rate

35
Q

What is meant by money supply (inflation) ?

A
  • if supply of money is increasing this is likely to increase prices in a country
  • this happens when govts print money to pay for goods and services
36
Q

What are Inflationary Expectations ?

A
  • rise in inflation causing a rise in expectations ➡️ this can then feed through to higher wage claims and rising costs
37
Q

How can interest rates effect inflation ?

A
  • increased interest rates mean people have less money to spend ➡️ therefore harder for businesses to raise prices
38
Q

What are the negative impacts of inflation ?

A
  • international exports become less competitive ➡️ UK prices rise faster than other countries
  • living standards decrease ➡️ prices increase meaning people cannot afford as much/have less money to spend (worse for those of fixed incomes eg. pensions)
  • consumers spend as they expect prices to rise in the future which leads to inflation increasing further
  • interest rates increase ➡️ people have to pay more to borrow
39
Q

What are the positive impacts of inflation ?

A
  • increased demand in the economy ➡️ encourages spending as people think prices are going to rise further
  • makes borrowed money less to pay off as it in now worth less + houses becoming worth more
  • pay rises
  • govt has less debt as they collect more tax (due to wage increases) + it is easier to pay off the money as is worth less
40
Q

Why is high inflation a problem ?

A
  • falling real incomes: workers will be worse off if wage rises lag behind price increases
  • cost of borrowing : increasing interest rates for businesses & consumers with debt eg. mortgage
  • risk of wage inflation: increase labour wages + lower profits
  • business competitiveness: decreased competitiveness which will lower demand for country’s exports
  • business uncertainty: difficult for businesses to plan their costs which may lead to a fall in investment
41
Q

Who are the winners from inflation ?

A
  • workers with strong unions
  • borrowers if real interest rates are negative
  • producers if prices rise faster than costs
  • wealthy people who own assets
42
Q

Who are the losers from inflation ?

A
  • retired on fixed incomes
  • lenders if real interest rates are negative
  • savers if real returns are negative
  • workers in low paid jobs

Macro Economics (13 decks)

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