2.1 Measures of Economic Performance Flashcards
What is meant by positive statements ?
- statements which can be proved by info and statistics
eg. Inflation is at 10.1%
What is meant by normative statements ?
- statements which are opinions/value judgements (they are subjective)
eg. the govts main objective should be to decrease inflation
What is GDP ?
- the market value of all final goods and services produced domestically in a time period (either a year or a quarter)
What are the three methods of measuring GDP ?
- 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)
Why is GDP important ?
- 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
Why do GDP figures get revised ?
- 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
What is the formula for measuring GDP ?
GDP= C+I+G+X-M
C- consumption
I- investment (stock and equipment) (fixed investments & inventories)
G- government
X-M - net exports (exports-imports)
What is gross national income ?
- 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)
What are the impacts of increased GDP ?
- increase jobs
- increase prices (inflation)
- increase international trade
- increase standards of living
- increase ££ for govt so increases public services
- damages the environment
What is meant by the circular flow of income ?
🔔 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
What are the 4 parts of the circular flow explained ?
- 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)
What are the leakages and injections in the circular flow of income ?
Leakages:
- savings
- taxation
- imports
Injections:
- government spending
- exports
- investment
What happens if injections are greater than leakages ? (and vice versa)
- injections > ➡️ the economy and GDP will increase
- leakages > ➡️ economy and GDP shrink/decrease
What is GDP per capita and its formula ?
- the total GDP of a country/total population
- used to estimate living standards for people in a country
GDP per capita= total GDP/population
What is meant by Real GDP ?
- a measure of a country’s GDP that has been adjusted for inflation
What is meant by Nominal GDP ?
- GDP not adjusted to inflation
What is meant by Purchasing Power Parity (PPP) ?
- 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
How useful is GDP to measure living standards ?
- 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
Define economic growth ?
- an increase in real GDP from one year to another
What are the limitations of GDP when measuring living standards ?
- 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
What are other factors that can be used to measure wellbeing ?
Economic:
- income (GDP)
- economic stability eg. inflation
- employment
Investment:
- health
- education
- infrastructure
Sustainability:
- income equality
- civil society
- government
- environment
What did the UK Well-being survey ask people to measure national wellbeing ?
- 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 ?
What is meant by inflation ?
- when the average price of goods and services is rising over a period of time
What is deflation ?
- ‘negative inflation’ ie. when average prices are falling overtime
What is disinflation ?
- occurs when inflation is slowing down ➡️ prices are still rising but at slower rate
What are the causes of inflation ?
- 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 = £££
What impacts does inflation have ?
- 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
How does the Bank of England try to control inflation ?
🔔 Bank of England have a target of 2% inflation
- borrow/take money from banks (control amount of money in circulation)
- change interest rates
What is CPI ?
- 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)
How is CPI measured ?
- 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
What are the limitations of CPI ?
- not representative of everyone: people have diff spending habits and so inaccurate for ‘non-typical households’
- new products: CPI is slow to respond to new products so takes a while to be added to the basket
- changing quality of goods/services: price may increase BUT could be accompanied by an increase of quality
- Doesn’t account for regional differences in the cost of living
What are the other measures of inflation ?
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)
What is meant by demand pull Inflation ?
- 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
What is meant by cost push Inflation ?
- 🔔 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
What is meant by money supply (inflation) ?
- 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
What are Inflationary Expectations ?
- rise in inflation causing a rise in expectations ➡️ this can then feed through to higher wage claims and rising costs
How can interest rates effect inflation ?
- increased interest rates mean people have less money to spend ➡️ therefore harder for businesses to raise prices
What are the negative impacts of inflation ?
- 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
What are the positive impacts of inflation ?
- 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
Why is high inflation a problem ?
- 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
Who are the winners from inflation ?
- workers with strong unions
- borrowers if real interest rates are negative
- producers if prices rise faster than costs
- wealthy people who own assets
Who are the losers from inflation ?
- retired on fixed incomes
- lenders if real interest rates are negative
- savers if real returns are negative
- workers in low paid jobs
