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%
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
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)
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)
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
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
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)
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)
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
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
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)
12
Q
What are the leakages and injections in the circular flow of income ?
A
Leakages:
- savings
- taxation
- imports
Injections:
- government spending
- exports
- investment
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
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
15
Q
What is meant by Real GDP ?
A
- a measure of a country’s GDP that has been adjusted for inflation
16
Q
What is meant by Nominal GDP ?
A
- GDP not adjusted to inflation
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
What is disinflation ?
- occurs when inflation is slowing down ➡️ prices are still rising but at slower rate
26
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 = £££
27
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
28
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
29
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)
30
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
31
What are the limitations of CPI ?
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
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)
33
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
34
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
35
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
36
What are Inflationary Expectations ?
- rise in inflation causing a rise in expectations ➡️ this can then feed through to higher wage claims and rising costs
37
How can interest rates effect inflation ?
- increased interest rates mean people have less money to spend ➡️ therefore harder for businesses to raise prices
38
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
39
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
40
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
41
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
42
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
