2.1 - Measures of economic performance

Question 1

State the objectives of economic growth in the SR + LR

Answer 1

SR - An increase in real GDP.
LR - An in improvement in the productive capacity and potentials

Question 2

State two ways economic growth/GDP is measured

Answer 2

1. Add up the value of all the EXPENDITURE in the economy (consumption, investment, govt spending and net exports)
2. Add up the value of all the INCOME in the economy (wages, interests, profits and rent)

Question 3

Distinguish between GDP, REAL GDP, NOMINAL AND GDP PER CAPITA

Answer 3

GDP = The total value of the final goods/services produced in an economy in a one year period.

REAL = Adjusted for inflation

NOMINAL = Not adjusted for inflation

PER CAPITA = GDP/population

Question 4

Define GNP\GNI

Answer 4

GDP + Net income earned abroad

Net income = The difference between income earned by citizens in our country from abroad and the income earned by foreigners in our country.

Question 5

Distinguish between value and volume of GDP

Answer 5

Value = The monetary worth (price x quantity)
Volume = The physical number (quantity only)

Question 6

Define PPPs and explain why they’re used

Answer 6

A conversion factor (alt to exchange rates) that can be applied to GDP/GNI/GNP. Calculated by comparing the purchasing power of different currencies.

Purchasing power = The quantity of the currency needed to purchase a common basket of goods/services.

AIM: To improve accuracy when comparing the data between countries.

Question 7

Explain the limitations of using GDP to compare living standards of between countries over time

Answer 7

Doesn’t take into account:

• An increase or decrease in QUALITY OF GOOD. If quality is poor but prices are lower, then the SOL is judged to have increase, whereas poor quality may have actually decreased SOL
• THE DISTRIBUTION OF INCOME as the differences in the SOL within the same country can be significant.
• VOLUNTARY/UNPAID WORK, for e.g. family child care provision. If included then GDP/capita would be higher
• Other factors such as environmental (pollution congestion), stress levels and no. of hours worked. If these increase then SOL fall even if incomes are higher.

Question 8

Explain national happiness and the link between income

Answer 8

Includes societal well-being and focuses on health, relationships, environment, education, satisfaction at work and living conditions.

Its measured in the UK by the office for national statistics (ONS).

The ‘Easterlin paradox’ is that idea that happiness and increasing incomes have a direct relationship but up to a certain point. Beyond this marginal gains in happiness falls.

Question 9

Distinguish between inflation/deflation/disinflation

Answer 9

inflation = A sustained increase in the general price level (target rate in the UK is 3% current is 3.4%)

deflation = A sustained decrease in the general price level

disinflation = Inflation is increasing at a decreasing rate

Question 10

Explain how CPI is calculated

Answer 10

1) A household basket of 700 goods/services that an average family would purchase is compiled on an annual basis, through an EXPENDITURE SURVEY.

2) The prices of these items are collected from around 150 different location’s each month

3) Goods/services in the basket are weighted based on the proportion of household spending.

4) The price x weighting determines the final value of the goods/services in the basket.

= cost of basket in year X / cost of basket in base year x 100

Question 11

Define index numbers and the state the equation

Answer 11

An economic data figure that reflects price/quantity compared with the base year (which always has a value of 100).

raw value/base year raw value x 100

Question 12

State the two inflation indices

Answer 12

CPI and RPI
The % difference in CPI/RPI between two years is the inflation rate for that period.

Question 13

Explain the limitations of using CPI