2.1 Measures of economic performance

Question 1

what is GDP

Answer 1

Gross Domestic Product is the total value of all new goods and services produced in a given year

Question 2

what is year on year growth

Answer 2

the percentage change between one year and the previous year

Question 3

what is a recession

Answer 3

two consecutive quarters of negative GDP growth

Question 4

what is purchasing power parity (PPP)

Answer 4

a measure of the price of specific goods in different countries and is used to compare the power of one currency against another

Question 5

what is a way you can measure economic growth

Answer 5

change in real GDP per annum

Question 6

what is economic growth

Answer 6

the rate of change of output

Question 7

what is the difference between total GDP and GDP per capita

Answer 7

Total GDP represents the overall GDP for the country whilst GDP per capita is the
total GDP divided by the number of people in a country

Question 8

what is the difference between real and nominal GDP

Answer 8

Real GDP strips out the effects of inflation whilst nominal GDP does no

Question 9

volume vs value

Answer 9

Real values can be described as the volume of national income i.e. the size of the
basket of goods, whilst nominal values represent the value of the national income i.e.
the monetary cost of this basket of goods.

Question 10

the equation for value

Answer 10

value=volume * price

Question 11

what is another national income measure

Answer 11

GNI- gross national income

Question 12

what is GNI

Answer 12

The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends

Question 13

what are some limitations of GDP

Answer 13

per capita
hidden economy
inequality
environmental degradation
comparisons
happiness
different currencies
inaccuracy of data
other factors contribute to standard of living like education

Question 14

what are the six indicators of happiness according to the UN happiness report

Answer 14

real GDP per capita, health, life expectancy, having someone
to count on, perceived freedom to make life choices, freedom from corruption, and
generosity.

Question 15

UK national wellbeing

Answer 15

2010, the UK Prime Minister launched the Measuring National Wellbeing report
to measure how lives are improving. They found that self-reported health, relationship status and employment status most affect personal well-being.
They ask 4 key questions about life satisfaction, anxiety, happiness and
worthwhileness, where people answer on a scale of 0 “not at all” to 10 “completely”.
The report is now updated on a quarterly basis, rather than annually.
In 2012-2016, life satisfaction, happiness and worthwhile have continued to rise
whilst anxiety levels fell but have begun to rise slightly. This could be as
unemployment is falling/GDP is rising but concerns over global security could be
causing anxiety.

Question 16

The relationship between real incomes and subjective happiness

Answer 16

One key finding of psychological research is that happiness and income are
positively related at low incomes i.e. if you are poor and your income increases,
you will be happier, but higher levels of income aren’t associated with increases
in happiness i.e. rich people aren’t necessarily happy and increases in their income won’t necessarily make them happier

Question 17

what is the Easterlin paradox

Answer 17

An increase in consumption of material goods will increase happiness if basic needs aren’t met (shelter and food), but once these needs are met, an increase in
consumption won’t increase long term happiness. For example, in the UK as we
already enjoy a high standard of living, even if GDP doubles, happiness will not
increase.

Question 18

what is inflation

Answer 18

an increase in the general price level

Question 19

what is an index

Answer 19

a statistical measure of relative change (change relative to a base year)

Question 20

what is a real figure

Answer 20

when a figure has been adjusted for inflation

Question 21

what is a nominal figure

Answer 21

when a figure has not been adjusted for inflation

Question 22

what is disinflation

Answer 22

a fall in the rate of inflation- prices are still rising but at a slower rate

Question 23

what is deflation

Answer 23

a decrease in the general price level

Question 24

hyperinflation

Answer 24

a rapid, significant, and uncontrollable increase in the general price level

Question 25

consumers price index (CPI)

Answer 25

The Office for National Statistics (ONS) collects prices on 710 goods and services
from 20,000 shops in 141 locations and online sites and the prices are updated every
month, with collectors visiting the same retailers to monitor identical goods. New
items are added to the list every year, such as microwaveable rice and nail varnish ,
whilst others are taken away, including organic carrots.
All these prices are combined using information on the average household spending
pattern to produce an overall price index. The average household spending is worked
out through the Living Costs and Food Survey, where around 5,500 families keep
diaries of what they spend over a fortnight.
It takes into account how much is spent on each item so they are weighted i.e. we
spend more on petrol than on postage stamps so an increase in petrol will have a
bigger impact on the overall rate of inflation.

Question 26

CPI=

Answer 26

weight*price change

Question 27

problems with inflation

Answer 27

Erodes the value of money, savings and wages
Uncertainty leads to lower consumer and business confidence
less internationally competitive so leads to fewer exports
menu costs- the price of changing price listings
shoe leather costs: the cost of using money today
political and psychological costs

Question 28

effects of inflation on consumers

Answer 28

Consumers:
● If people’s incomes do not rise with inflation then they will have less to spend , which
could cause a fall in living standards.
● Those who are in debt will be able to pay it off at a price which is of cheaper value,
but those who are owed money lose because the money they get back is of cheaper
value. Consumers who have saved will lose out as their money is worth less.
● Inflation has psychological effects on consumers: because prices are rising, they
may feel less well-off, even if their income is rising in line with inflation, and so this
may cause them to decrease their spending.

Question 29

effects of inflation on firms

Answer 29

If inflation in Britain is higher than other countries, British goods will be more
expensive. They will become less competitive and make them more difficult to
export. This will also affect the balance of payments.
● Deflation isn’t good as it encourages people to postpone their purchases as they
wait for the price to fall further. People will be more likely to save as the value of their
money will rise in the future and they will be prevented from borrowing as deflation
means the real value of their debt increases. This can lead to a fall in demand for
goods, leading to a fall in firms’ profit, and in business confidence which can lead to a
long term reluctance to invest.
● In general, inflation/deflation/disinflation is difficult to predict and so this means that
firms cannot plan for the future.
● Another effect of changing prices is that firms will have to calculate new prices then
change their menus, labelling etc. and this can be expensive.

Question 30

effects of inflation on workers

Answer 30

If workers do not receive yearly pay rises of the rate of inflation, they will be worse
off and their living standard will decrease. Those in weaker unions tend to be most
affected as they are unable to win wage rises in line with inflation.
● Deflation could cause some staff to lose their jobs as there is a lack of demand
meaning firms see a fall in profit and have to decrease staff to cut costs.

Question 31

effect of inflation on government

Answer 31

If the government fails to change excise taxes (taxes at a set amount e.g. £1) in line
with inflation then real government revenue will fall. However, if they fail to change
personal income tax allowances (the amount a worker can earn tax free) then real
government income will increase and taxpayers will have less money.

Question 32

what are the problems with deflation

Answer 32

a sign of economic slowdown
discourages consumer spending : downwards spiral
debt value increases in real terms. borrowers worse off

Question 33

what is demand pull inflation

Answer 33

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.
● If any factor which increases AD was to increase , then inflation would increase

Question 34

what is cost push inflation

Answer 34

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

Question 34

how does the growth of money supply cause inflation

Answer 34

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.
● The government can also increase the amount of money that they print and decisions to increase government borrowing can also increase the money supply.

Question 35

rising property prices

Answer 35

wealth effect, more confidence and spending, demand-pull sprending

Question 35

rising global oil prices

Answer 35

higher costs of production, passed onto consumers, cost push inflation

Question 35

a depreciation of the £

Answer 35

increased import prices, increase in exports (injection), cost-push and demand-pull inflation

Question 35

a cut in interest rates

Answer 35

cheaper burrowing, more spending, demand-pull inflation

Question 35

a decrease in VAT

Answer 35

lower cost of production, passed onto consumers, cost-push disinflation/ deflation

Question 36

workers expect future inflation

Answer 36

demand higher wages, higher costs of products passed on to consumers, cost-push and demand-pull inflation

Question 37

limitations of CPI

Answer 37

not fully representative- median household/ basket of goods
basket of goods not updated fast enough
fails to take into account- quality- technological improvements, quantity “shrinkflation”
data handling/ collection issues
doesn’t include hosing prices
more recent than RPI so hard to make comparisons with historical data

Question 38

why do some people argue that all inflation indices overestimate inflation

Answer 38

because they don’t take into account the fact that goods and services have improved in quality, and so will obviously be more expensive. For example, a car in the 1950s would be far less comfortable and reliable than today’s. It has no way of indicating the change of goods that is bought.

Question 39

Retail price index (RPI)

Answer 39

The RPI is very similar to the CPI. However, there are some differences between the data
included and the way it is calculated.
● 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.
RPI is no longer considered as the best method and has had its national statistic status
removed, although the Office for National Statistics still calculates it every month.

Question 40

what is the working age population

Answer 40

all those between the aged 16-64 years

Question 41

what is the labour force

Answer 41

all those able and willing to work

Question 42

what is employment

Answer 42

the proportion the working-age population that is working

Question 43

what is umemployment

Answer 43

the proportion of the working age population that is actively seeking work but not working

Question 44

what is underemployment

Answer 44

employed but seeking more hours
over qualified for their job

Question 45

what is the claimant count

Answer 45

records the number of people claiming unemployment-related benefits

Question 46

advantages of the claimant count

Answer 46

easy and cheap to collect

Question 47

disadvantages of the claimant count

Answer 47

may be susceptible to political manipulation
exclude people who are out of work, actively seeking but do not claim(training schemes)
fraud could lead to overestimating unemployment
have to be unemployed for 4 weeks to claim job seekers allowance

Question 48

international labour organisation and uk labour force survey

Answer 48

surveys and estimated the number of people whoa are without a job + actively seeking work + available to start in the next two weeks

Question 49

advantages of the ilo

Answer 49

more accurate
based on international standards

Question 50

disadvantages of the claimant count and the ilo

Answer 50

more costly to compile
only need to work for 1 hour to be counted as employed
time lag (out of date?)

Question 51

comparisons between the claimant count and lfs

Answer 51

Some people may not be included in the LFS unemployment measure but would be
in the Claimant Count. These may include people working in the hidden economy or
those who fraudulently claim benefits.
● However, some people aren’t eligible for benefits but are classed as unemployed
so would appear in the LFS but not the Claimant count. This can be if their partner is
working, if they are looking for work along full-time study or if they are around State
Pension Age. The LFS tends to be higher than the Claimant Count because of
these reasons.
● Sometimes, the claimant count and LFS rates can be going in different directions.
This could be due to the fact that the LFS is only a sample and different types of
people have been asked which can lead to short term changes in the rate. Also,
there may be things happening in the labour market not covered by the Claimant
Count, for example more students could look for work along their studies or more
people above State Pension Age may look for work.
It is argued that both underestimate the figure as they do not include those:
o working part time but would like to work full time
o on government training schemes who would prefer employment
o classed as sick or disabled
o who aren’t actively looking for jobs but would take a job if offered or are in education
because they can’t get a job

Question 52

types of unemployment

Answer 52

seasonal
frictional
geographical
structural
real wage
cyclical

Question 53

seasonal unemployment

Answer 53

Some employment is strongly seasonal in demand . Industries such tourism are
only prominent during certain times of the year so only demand large numbers of
workers at a specific time. Once that time of the year has passed then the labour
force is drastically reduced

Question 54

frictional unemployment

Answer 54

Frictional unemployment is due to people moving between jobs. This could be due
to new workers entering the labour market or people who have chosen to leave their
previous job. These people may take a while to locate and gain a job that they are
willing to accept.
● This isn’t a serious problem as it is only short term.

Question 55

geographical unemployment

Answer 55

unemployment due to location

Question 56

structural unemployment

Answer 56

This is a much more serious form of unemployment as it is a long term decline in
demand in an industry leading to reduction in employment perhaps because of
increasing international competition or technology. It is where the demand for labour
is lower than the supply in an individual labour market e.g. ship building.
www.pmt.education
● The lack of geographical and occupational mobility means that people will remain
unemployed, so need to be retrained in order to gain a job.
● There are different types of structural unemployment.
o Regional unemployment is where certain areas of a country suffer from very
low levels of employment due to industry closures; this is made even worse
by the fact that the loss of jobs can mean a fall in demand for other
businesses in the area, forcing more closures and job losses.
o Sectoral unemployment is where one sector (primary, secondary and
tertiary) suffers a dramatic fall in employment.
o Technological unemployment is where an improvement in technology
means that jobs are replaced.

Question 57

real wage inflexibility

Answer 57

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.
● Some economists believe that the minimum wage risks creating unemployment in
industries where international competition from low-labour cost producers is
severe. As yet, there is relatively little evidence that the minimum wage has created
rising unemployment on the scale that was feared.
● It can also be caused by unemployed workers refusing to take low paid jobs because
they can receive more in welfare benefits.

Question 58

cyclical uneployment

Answer 58

This is unemployment due to a general lack of demand of goods and services
within the country. This is also known a Keynesian ‘demand deficient’
unemployment.
● When there is a recession or severe slowdown in economic growth, we see a rising
unemployment because of plant closures, business failures and an increase in
worker layoffs and redundancies. This is due to a decrease in demand causing
businesses to cut employment in order to control costs and restore some of their
profitability.

Question 59

migration

Answer 59

An increase in net inward migration tends to lead to increased jobs. Since the
1990s, the UK has seen a large increase in immigration from mainly Eastern
European countries. Most of these people come to the UK to work, are of working
age and often take lower skilled jobs; they are less likely to claim benefits than the
existing population. Due to the circular flow of income, immigrants’ spending
creates jobs and total employment increases without an increase in unemployment.
This depends how much money immigrant workers send back home.
● However, it also leads to lower wages, particularly for lower-paid, low skilled jobs.
UK firms are able to recruit foreign workers meaning that supply of labour is
increased and so the price equilibrium of labour is reduced. There is more
competition for jobs and UK workers who have low motivation to work and are low
skilled are most affected as they are competing in the job market with hard working,
more skilled workers prepared to take the same jobs as them. The impact of this is
only small and middle and higher income wages are rarely affected.

Question 60

skills (migration)

Answer 60

Economies progress over time, and as a result, higher skills are needed to work in
them. In the UK 50 years ago, many jobs were available for those who couldn’t read
or write but now there are few.
● For the UK to maintain its employment levels, it needs to increase the skills of its
workforce over time. Structural unemployment is caused by a lack of, or the wrong,
skills. For example, engineering companies struggles to recruit skilled workers even
though there are unemployed workers in the local area.
● If firms will not train staff, the government has to step in to correct the market failure
but this is costly. As a result, people become long-term unemployed as their skills
don’t fit the jobs on offer.
● Migrant workers may fill these shortages if their skills fit.

Question 61

benefits of migration

Answer 61

economic growth
flexible labour markets
fill job vacancies
working migrants provide a net fiscal benefit (tax> welfare)

Question 62

disadvantages of migration

Answer 62

potential fall in real wages
increased pressure on public services
dependents can be a fiscal drag (welfare> tax

Question 63

impacts of unemployment on workers

Answer 63

pros:
forces workers to retrain/ become more competitive/ productive

cons:
loss of income
fall in living standards
psychological and social cost
loss of skills (hysteresis)
less attractive to potential future employer

Question 64

impact of unemployment on firms

Answer 64

pros:
less pressure to increase wages
reduced risk of industrial strike action
can offer offer lower wages

cons:
fall in the demand of goods/ services
fall in the demand further along the supply chain (negative multiplier)
decrease in profits
Long term unemployment can lead to loss of skills and reduce employability of
workers, so firms have a smaller pool of skilled people to employ.
redundancy/ downsize costs

Question 65

impacts of unemployment on the government

Answer 65

pros:
less ppl demand higher wages- dampens wage growth demands, therefore helps government manage inflation

cons:
increase in welfare spending
fall in tax revenue- income, corporation, VAT
This will result in an increase in the budget deficit. It will be likely that the
government will have to raise taxation or scale back plans for public spending on
public and merit goods, such as the NHS or education. They may need to increase
borrowing.
increase in government spending
political pressure

Question 66

impacts of unemployment on the economy

Answer 66

pros:
creative destruction ( forces workers, businesses and government to reconsider current plans)

cons:
loss in GDP
under utilisation of factor inputs (productively inefficient)
hysteresis

Question 67

impacts of unemployment on society

Answer 67

Rising unemployment is linked to social deprivation. There is a relationship with
crime and social dislocation (increased divorce rates, worsening health and lower life
expectancy).
● Areas of high unemployment often see a fall in demand for local goods and services,
leading to a fall in income for those working in the services and sometimes further
loss of jobs.
● It results in a loss of potential national output and represents an inefficient use of
scarce resources. If people chose to leave the labour market permanently, then this
will have a negative effect on LRAS and therefore damage the economy’s growth
potential so the country is unable to achieve their desired PPF.
● Taxpayers paying money to the unemployed is not a loss for the economy as it is a
transfer payment but the economy is affected because there is a fall in national
output and the social costs of the unemployed e.g. violence and crime.

Question 68

hysteresis

Answer 68

claims recession can have permanent negative impacts on the economy/ labour market
bargaining power- still employed workers have greater bargaining power and can prevent real wages from falling
opportunity cost- whilst unemployed, individuals lose out on training opportunities, permanently decreasing their productivity levels- therefore harms potential growth