2.1 Measures of Economic Performance Flashcards
What is Economic growth?
- The rate of change of output
- An increase in the long term productive potential of the country
What is GDP?
- The total value of goods and services produce in a country within a year
- And an indicator of standard of living in a country
What is Total GDP?
The overall GDP of the country
What is GDP per Capita?
The total GDP ÷ the number of people in a country
When does GDP per Capita grow?
When national output grows faster than the population over a given time period
What is Real GDP?
GDP which strips out the effects of inflation
What is Nominal GDP?
GDP which doesn’t strip out the effects of inflation
What is GNI?
The value of goods and services produced by a country over a period of time plus next overseas interest payments and dividends
Why would GNI be used more than GDP?
Because of the growing size of remittances and aid
What is GNP?
The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically and overseas
Why would GNP be used instead of GDP?
As it takes into account for people in which do not live in the country also
What are the two comparisons we can make about growth?
- Over time
- Between Countries
How can we make comparisons about growth over time?
Changing national income levels will show us whether the country has grown or shrunk over a period of time
- Data can be compared to similar other countries to determine if the country has seen good growth or not
- Data can make judgements about economic welfare as growth in national income means a rise in living standards and so people have more choice due to the increased goods and services
When making comparisons about growth over time, why is it important per capita figures?
- Because if a country’s population grows over time, this may cause a rise in GFP without a rise in living standards and so provide inaccurate comparisons
When making comparisons about growth over time, why is it important REAL figures?
- This is in order to strip out the effect of inflation
- Inflation rises prices and therefore can give the impression of GDP growing without any more services and goods being produced
How can we make comparisons about growth between countries?
- We use Real GDP per Capita
- This is because having a difference in population and total GDP doesn’t necessarily mean a difference in living standards
- Real as different countries have different inflation rates and we want to strip that out
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
Why would using PPP be useful?
As it takes into account the cost of living, and so will help us better compare living standards
What are the problems with using GDP to compare standards of living?
- Inequalities
- Spending
- Inaccuracy of data
Explain Inequalities as a problem of using GDP to compare standard of 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
- Income distribution changes overtime and varies between countries so makes comparisons difficult
Explain Spending as a problem of using GDP to compare standard of living
- Some types of expenditure, such as defence, does not increase standard of living but will increase GDP
- E.g. the GDP of the UK was higher during WW2 than in the 1930s because a lot of money was spent on defence
- This will make comparisons difficult as spending varies overtime and between countries
Explain Inaccuracy of data as a problem of using GDP to compare standard of living
- Some countries are inefficient at collecting or calculating data and
therefore comparisons can become less effective. - There are black markets in which people work without declaring
their income to avoid tax or to continue claiming benefits, and so GDP is underestimated because these incomes aren’t taken into account. This varies hugely between countries and may change overtime. - GDP does not take into account home-produced services, for example in many poorer countries people work as subsistence farmers where they grow and consume their own crops without trading, and so the GDP is underestimated. This can also be true in the UK where DIY or the service of house-wives/husbands are not recorded.
- Errors in calculating the inflation rate means real GDP will be slightly
inaccurate. - Over time, methods used to calculate GDP will change and so therefore it can be difficult to compare countries overtime. Similarly, different countries
may use different methods to calculate their GDP. - Also, it is important to take away transfer payments, when money is paid to a person without any corresponding increase in output in the economy. For example, the government taxes people who are employed and then gives it
straight to the people who are unemployed. Other examples include pocket money and the selling of second hand goods.
What are the UN’s six key factors on the happiness report?
- Real GDP per Capita
- Health
- Life expectancy
- Having someone to count on
- Perceived freedom to make life choices
- Freedom from corruption
- Generosity
Summarise the UK national wellbeing
- In 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.
Summarise Real incomes and subjective happiness
- 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. - This is called the Easterlin Paradox. 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.
- Another finding is that income and 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. - Income is linked to social status and higher social status tends to make us happier.
What is inflation?
The general increase of prices in the economy which erodes the purchasing power of money
What is deflation?
The fall of prices and indicates a slowdown in the rate of growth of output in the economy
What is disinflation?
The reduction in the rate of inflation
How is the Consumer Price Index calculated?
- Prices are combined using information on the average household spending pattern to produce an overall price index
- Average household spending is worked out through the Living Costs and Food Survey
- It takes into account how much is spent on each item so they are weighted
Given an example on how the Consumer Price Index is useful?
- 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
What are the Limitations of Consumer Price Index?
- It is not totally representative as it is impossible for the figure to take into account every single good that is sold in the country
- It does not include the price of housing, and since this has tended to rise than the other price of goods, the data may be lower than it should be
- It is difficult to make comparisons with historical data, unlike the RPI it was only used since 1996 with estimates going back to 1988
- Some people argue that all inflation indices overestimate inflation because they don’t take into account the fact goods and services have improved in quality, so will have to be more expensive
Differences between Retail Price index and Consumer Price Index
- RPI includes housing costs such as mortgages, interest rates, council tax unlike CPI
- RPI doesn’t take into account the fact that when prices rise people will switch to products that have gone up less, therefore CPI is generally lower than RPI
- RPI excludes the top 4% of income earners and low income pensioners as they are not average households whereas CPI covers all
What are the three causes of inflation?
- Demand Pull
- Cost Push
- Growth of money supply
What is Demand Pull inflation?
- Where prices in a market are determined by demand and supply
- A shift in either will cause price to change
- Inflation can therefore be caused by an increase in AD
If any factor which increases AD was to increase….
then inflation would increase
What is Cost Push inflation?
- Where firms respond to rising unit costs by increasing prices to protect their profit margins
- Caused by any factor which decreases AS
What is Growth of money supply?
- When there is 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 are the effects of inflation on consumers?
- Consumers will have less to spend if their incomes do not rise with inflation - causing a fall in living standards
- Consumers in debt will be able to pay it off at a price which is of cheaper value
- Consumers who are owed money lose because the money they get back is cheaper value
- Consumers who save will lose out as their money is worth less
- Psychological effects: if 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
What are the effects of inflation on firms?
- British goods will be more expensive, so there will be less competition and make it more difficult for firms to export, affecting the balance of payments
- Firms can not plan for the future as inflation is hard to predict
- Undergoing calculating new prices then changing their menus/labels which can be quite expensive
