2.1 Measures of Economic Performance Flashcards
What is economics growth
It is an increase in the long term productive potential of the country which means there is an increase in the amount of goods and services that a country produces.
How is economic growth measured
This is typically measured by the percentage change in real GDP per annum
What is GDP
GDP is an indicator of the standard of living in a country.
What is total GDP
the overall GDP for the country
How does GDP per capita grow
This grow if national output grows faster than population over a give time period
What is the difference between real and nominal GDP
Real GDP strips out the effects of inflation whilst nominal GDP does not.
What is gross national income
The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends.
What is gross national product
it is the value of all the goods produced by citizens of a country, whether they live in the country or not
What are purchasing power parities
An exchange rate of one currency for another which compares how much a typical
basket of goods in the country costs compared to one in another country.
What are the six key factors affecting happiness
- real GDP per capita
- health
- life expectancy
- having someone to count on
- perceived freedom to make life choices
- freedom from corruption
What is the Easterlin paradox
This is the idea that happiness will increase while basic needs aren’t met however once these needs are met an increase in consumption won’t increase long term happiness
What is inflation
is the general increase of prices in the economy which erodes the purchasing power of money. Low inflation is generally considered to be better than high inflation
What is deflation
is the fall of prices and indicates a slowdown in the rate of growth of output in the economy.
What is disinflation
is a reduction in the rate of inflation i.e. prices are still rising but they are not rising by as much.
What is the consumer price index
It measures the average change in prices paid by consumers over a period of time for a basket of goods
What are limitations of CPI
- Does not measure housing which increases the most as a good
- relatively knew system so no passed data to compare to
- impossible for the figure to take into account every single good that is sold in the country and so therefore the CPI is not totally representative
What is the difference between the retail price index and consumer price index
● RPI includes housing costs such as mortgage and interest payments and council tax, whereas CPI does not.
● CPI takes into account the fact that when prices rise people will switch to product that has gone up by less. Therefore, the CPI is generally lower than the RPI.
● RPI excludes the top 4% of income earners and low income pensioners as they are not ‘average’ households whilst CPI covers all households and all incomes.
What are some of the effects of inflation on consumers
- without a rise in income there quality of life will decrease
- those in debt will be able to pay it off at a lower value
- psychological effects of prices rising may make them feel less well off
What are the effects of inflation on firms
- This means British goods may be more expansive than other countries making them less competitive
- it is difficult to predict and firms cannot plan for it
- deflation encourages people to postpone their purchases and wait for a further drop in cost before they begin spending
What is the effect of inflation on governments
Tax will have to increase in line with inflation
What is a claimant count
The Claimant Count is the number of people receiving benefits for being unemployed
What are the conditions for someone to be considered employed
Those who do more than 1 hour of paid work a week or are temporarily away from work
What are the conditions for someone to be considered unemployed
Those of working age who are without work, able to work and seeking work and have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks.
What are the conditions for someone to be considered inactive
Those who are neither employed nor unemployed; they are people of working age not seeking employment as well as those seeking employment but not able to start work
What is underemployment
- The underemployed are those who are in part time or zero hour contracts when they would prefer to be full time and people who are self-employed but would rather be employees.
- also includes those who are in jobs which do not reflect their skill level
What is frictional unemployment
Frictional unemployment is due to people moving between jobs
What is structural unemployment
It is a long term decline in demand in an industry leading to reduction in employment. technology. It is where the demand for labour is lower than the supply in an individual labour market
What is seasonal unemployment
Some employment is strongly seasonal in demand
What is cyclical unemployment
This is unemployment due to a general lack of demand of goods and services within the country.
What is real wage inflexibility
This is unemployment considered to be the result of real wages being above their market clearing level leading to an excess supply of labour. Some workers might be prepared to work for less than the minimum wage and companies may be prepared to take on more workers if they could pay them less than the minimum wage, but this is illegal and so unemployed workers cannot get a job.
What is the effect of unemployment on workers
- loss of income
- stigma
- long term unemployed often find getting work hard
What is the effect of unemployment on firms
- Decrease in demand for goods
- firms can offer lower wages
What is the effect of unemployment on the government
- fall in tax revenue
- increase in budget deficit
What is the effect of unemployment on society as a whole
- Rising unemployment is linked to social deprivation.
- Areas of high unemployment often see a fall in demand for local goods and services,
- It results in a loss of potential national output
What are the components of balance of payment
The balance of payments is made up of the current account and capital and financial account
Current account - This records payments for the purchase and sale of goods and services
Capital and financial account - This records the flows of money associated with saving, investment, speculation
What is the current account
This is a component of the balance payment which records purchase and sale of goods
What is the capital an financial account
A component of the balance payment which records flows of money associated with investment and savings
What is the difference between real and nominal goods
Real values should be described as the volume of national income
Nominal values should be described as representative of the value of national income
What is the difference between Real values and nominal values when applied to a basket of goods
Real values are the size of the basket of goods
Nominal values are the monetary cost this basket of goods
What are the factors which are taken into account in gross nation income but not in gross national product
Income includes what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home from the GDP.
What can changes in gross national income imply to us about countries
Changing national income levels will show us whether the country has grown or shrunk over a period of time.
What are some of the key problems of using GDP to compare standards of living
- inaccuracy of data
- inequalities
- quality of goods and services
- where the spending goes
Why is inaccuracy of data a problem when using GDP to compare standard of living
- not every country will collect data as accurately
- there can be black markets where people do not declare their income
- errors in calculating the inflation rate
What are some issues to due to inequalities while using GDP to compare the standard to living
An increase in GDP may be due to a growth in income of just one group of people and so therefore a growth in the national income may not increase living standards everywhere.
Why is the quality of goods and services a problem when using GDP to compare standard of living
The quality of goods and services is much higher than those fifty years ago, but this is not necessarily reflected in the real price of these goods and services.
Why may where the spending goes be a problem when using GDP to compare standard of living
Some types of expenditure, such as defence, does not increase standard of living but will increase GDP.
What was found about happiness being related to who we surround our self with
happiness depends on the people around us. For example, if you are the richest out of everyone you associate yourself with, then you will be happier than someone who has the exact same income but is the poorest out of everyone they associate with
What is demand pull inflation
Prices in a market are determined by demand and supply and a shift in either will cause price to change. Inflation can therefore be caused by an increase in aggregate demand (AD), total demand for goods and services in the economy.
What is cost push inflation
● Whilst an increase in aggregate demand can push prices up, a decrease in aggregate supply may also push prices up.
● When businesses find their costs have risen, they will put up prices to maintain their profit margins. This can be caused by any factor which decreases AS
How can the growth of money supply cause inflation
Another potential cause of inflation is there being too much money in the economy. If people have access to money they will want to spend it but if there is no increase in the amount of goods and services supplied, then prices will have to rise.
What is the effects of inflation on workers
-If workers do not receive yearly pay rises of the rate of inflation, they will be worse off and their living standard will decrease
- Deflation could cause some staff to lose their jobs as there is a lack of demand meaning firms see a fall in profit
What are some comparisons between the claimant count and Labour force survey
- some people included in the claimant count would not be in the LFS. (hidden economy or those who fraudulently claim benefit)
- some people aren’t eligible for benefits but are classed as unemployed so would appear in the LFS but not the Claimant count.
What is the UK labour force survey
a sample of people living in households and is a legal requirement for every country in the EU. It asks questions about personal circumstances and activity in the labour market to class people as employed, unemployed or inactive by the ILO definitions.
Who are the key people who are left out in both the LFS and Claimant count
- working part time but would like to work full time
- on government training schemes who would prefer employment
- classed as sick or disabled
-who aren’t actively looking for jobs but would take a job if offered
What is the employment rate
the percentage of the population of working age who are employed,
What is the unemployment rate
unemployment rate is the percentage of the economically active who are unemployed.
What can be the effects of significant increase in economic inactivity
Increases in inactivity will decrease the size of the labour force, therefore causing a fall in productive potential of the country. There will be a lower GDP and lower tax revenues as less people are working.
What is looked at when viewing the balance of payments
Flows of money into the economy are given a positive sign and flows of money out are given a negative sign.
What is the current account made up of
Trade in goods - visible goods that are traded
Trade in services - these are traded services which cannot be seen
How is the balance of trade in goods and services calculated
The balance trade + balance of invisibles
How is the current balance calculated
Balance of trade + Balance of invisibles + net income and current account transfers
What is a current account surplus
where exports are greater than imports, so the current balance is positive.
What is a current account deficit
where imports are greater than exports, so the current balance is negative.
What are the governments main four macroeconomic objectives
- low unemployment
- low and stable inflation
- economic growth at a similar rate to other economies
- a balance of payment equilibrium including current account balance.
What does high economic growth tend to lead to
the current account becomes a deficit as there is increased imports due to increased demand
What do governments tend to want in order to achieve economic growth and why
export led growth, which would cause economic growth, high employment and improve the current account balance
What are the four ways which the world economy has become more interconnected
● The proportion of output of an individual economy which is traded internationally is growing.
● Many more people (or companies) own assets in other countries such as shares, loans or businesses.
● There is increasing migration between countries
● More technology being shared on a faster basis.
Draw and explain a graph which shows the problem of real wage inflexibly
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