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A-Level Economics Edexcel > 2.1 Measures of Economic Performance > Flashcards

2.1 Measures of Economic Performance Flashcards

1
Q

What does National income accounting measure?

A

the economic activity within a country
- providing sn insight to how the country is performing

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2
Q

What does GDP stand for?

A

Gross Domestic product

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3
Q

What is the main method to determine economic activity?

A

the rate of change of output in an economy

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4
Q

What is the GDP?

A

the value of all goods and services produced in an economy in a one year period

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5
Q

What is economic growth?

A

the rate of change of output
- an increase in the long term productive potential of the country
- thus an increase in amount of goods and services that a country produces

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6
Q

How is economic growth measured?

A

percentage change in real GDP per annum

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7
Q

How can GDP be measured?

A

As income or as expenditure

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8
Q

What is the expenditure approach to measuring GDP?

A

adding up the value of all the expenditure in the economy
- includes consumption, government spending, investment by firms and net exports (AD)

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9
Q

What is the income approach to measuring GDP?

A

adds up the rewards for the factors of production used
- wages from labour, rent from land, interest from capital, and profit from entrepreneurship

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10
Q

What is the value of GDP?

A

monetary worth

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11
Q

What is the volume of GDP?

A

physical number

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12
Q

What does the term nominal mean in economics?

A

a metric not adjusted for inflation

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13
Q

What is Nominal GDP?

A
  • actual value of goods and services produced in an economy in a one year period
  • no adjustments to the value to the amount based on the increase in general price levels
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14
Q

What is the real GDP?

A

the value of all goods and services produced in an economy in a one-year period adjusted for inflation

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15
Q

What is GDP per capita?

A

GDP/ population

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16
Q

What does GDP per capita represent?

A

mean wealth of a citizen in a country
- makes it easier to compare standards of living between countries

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17
Q

When does real GDP grow?

A

if national output grows faster than population over a given time period,
- so there are more goods and services to enjoy per person

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18
Q

What does GNI stand for?

A

Gross national income

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19
Q

What is the GNI?

A

measurement of the income earned by citizens operating outside of the country and the GDP
- accounts for citizens who employ resources outside of the countries borders and sends the income home

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20
Q

What does GNP stand for?

A

Gross National Product

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21
Q

What is the GNP?

A

GDP + income from abroad

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22
Q

What is the GNP/capita?

A

GNP/ population
- provides a more realistic view of a country’s wealth than GDP

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23
Q

What are national income statistics useful for?4

A
  • making comparisons between countries
  • providing insights on the effectiveness of government policies
  • allowing judgments to be made about the relative wealth and standard of living within each country
  • allow comparisons to made over the same or different time periods
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24
Q

Why is real GDP a better comparison than nominal GDP?

A

a country may have a higher rate of economic growth but also a higher rate of inflations
- thus real GDP is better

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25
Q

What does PPP stand for?

A

Purchasing Power Parities

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26
Q

What is PPP?

A
  • conversion factor that can be applied to GDP, GNI and GNP
  • calculates the relative purchasing power of different currencies
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27
Q

What is the aim of the PPP?

A

to help make a more accurate standard of living comparison between countries where goods/ services cost different amounts

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28
Q

Definition of PPP?

A

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

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29
Q

If a basket goods in Vietnam is £100 and the same basket goods in England is £300. What would the PPP be, and what would this mean? 4

A
  • the PPP would be 1:3
  • this seems the cost of living in England is higher
  • but if the GNP/capita is more than 3 times higher in Eng than Vietnam then England arguably has a better standard of living
  • if the GNP/capita is less than 3 times that of Vietnam then enjoys a higher standard of living as they spend less income to acquire the same goods/services
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30
Q

What are the limitations of using GDP for comparisons? 5

A
  • inequality
  • quality of goods/ services
  • uninclusion of unpaid/voluntary work
  • differences in hours worked
  • environmental factors
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31
Q

Why is ‘inequality’ a limitation of using GDP for comparisons?

A
  • the distribution of income in an economy is provided as an average in the form of GDP/capita
  • the differences in the standard of living in the same country can be significant thus does not reflect accurately
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32
Q

Why is ‘the quality of goods and services’ a limitation of using GDP for comparisons?

A
  • gdp provides no information on the increase/decrease in the quality of goods/services over time
  • if quality worsens but prices are lower, then the standard of living is judged to have increased
  • th poor quality may actually have decreased the standard of living
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33
Q

Why is ‘voluntary/unpaid work not being included’ a limitation of using GDP for comparisons?

A
  • if included gdp/ capita would be higher
  • e.g. having large amounts of family child care provisions the standard of living increases but is not recorded
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34
Q

Why is ‘hours being worked’ a limitation of using GDP for comparisons?

A
  • gdp data does not capture the amount of time taken to produce the GDP/capita
  • if one country takes less time to generate the income than in a similar country, the standard of living would actually be. higher
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35
Q

Why is ‘environmental factors’ a limitation of using GDP for comparisons?

A
  • gdp does not capture environmental and health impacts of generating the income within a country (externalities)
  • in one country with fewer externalities in generating income, standards of living would be higher.
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36
Q

What are the 7 key factors that affect welfare other than gdp (which only measures income?

A

-realGDP per capita
- health
- life expectancy
- having someone to count on
- perceived freedom to make life choices
- freedom from corruption
- generosity

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37
Q

What most effects personal well-being3

A
  • self reported health
  • relationship status
  • employment status
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38
Q

What is the name of the report to measure how lives are improving in the UK? who created it and when?

A
  • in 2010
  • uk prime minister
  • measuring national wellbeing report
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39
Q

What does the ‘Measuring National Wellbeing’ report consist of? 1+4, 2

A
  • 4 Key questions about:
    • life satisfaction
    • anxiety
    • happiness
    • worthwhileness
  • questioned answered on a scale of 0-10
  • report updated on a quarterly bases, rather than its former annual analysis
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40
Q

What did the Measuring of national wellbeing report relay in 2012-2016?3

A
  • life satisfaction, happiness and worthwhile have risen while anxiety levels fell but have begun to rise slightly
  • this may be due to a fall in unemployment or a rise in GDP
  • or concerns over global security could be causing anciety
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41
Q

How are real incomes and subjective happiness related?

A
  • happiness and incomes are positively related at low incomes but not associated at high levels of incomes
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42
Q

What is the Easterlin Paradox?

A
  • basic increase in consumption of material goods will increase happiness if basic needs aren’t met, but once met an increase in consumption won’t increase long-term happiness
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43
Q

What is inflation?

A

Sustained increase in the general price level that erodes the purchasing power of money
- low inflation is considered to be better than high inflation

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44
Q

How is the general price level measured?

A
  • by checking the prices of a basket of goods and services that an average household will purchase each month
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45
Q

What is the UK inflation target ?

A

2±1%

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46
Q

What is deflation?

A

Fall in the average price level of goods and services in an economy
- only occurs when the percentage change in prices falls below 0%

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47
Q

What is disinflation?

A

when average price level is still rising but at a lower rate than before
- inflation is increasing but at a decreasing rate

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48
Q

What is the inflation rate?

A

change in average price levels in a given time period
- calculated using an index with 100 as the base year
- if the index is 100 in year 1 and 107 in year 7 the inflation rate is 7%

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49
Q

What are the 2 inflation indices used by the UK?

A
  • consumer price index
  • retail price index
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50
Q

How is the basket goods calculated?5

A
  • household basket goods of 700 goods/services that an average family would purchase is compiled on an annual basis.
  • basket is weighted based on proportion of household spending
  • each month, prices for the basket goods are gathered from 150 locations across the uk are averaged out
  • the price x the weighting determines the final value of the good/service in the basket
  • the final values are added together to determine the price of the ‘basket’
51
Q

How is a basket goods created?

A
  • household expenditure survey is conducted to determine what goes into the basket
  • some exit while others are added
52
Q

How is the CPI calculated?

A

CPI = (Cost of basket in year X)/(Cost of basket in base year) x 100

53
Q

What does the CPI present?

A

the percentage difference in CPI between the two years is the inflation rate for the period

54
Q

What are the limitations of using the CPI?5

A
  • only provides average basket, not basket of many households
  • one of several methods used to determine inflation
  • quality of the products in basket is not captured
  • only measures change in consumption on an annual basis
  • prone to errors in data collection
55
Q

Why is the CPI providing a level of inflation for the average basket a limitation of using CPI?

A
  • dependent on what households buy the level of inflation for each one can vary significantly
  • as an average, regional differences in inflation are not accounted for
56
Q

Why is CPI being one of the several methods used by countries a limitation of using CPI?

A
  • making comparisons between countries less meaningful as the may use other versions of CPI
57
Q

Why is the quality of the products in the basket a limitation of the CPI?

A
  • product quality changes over time
  • so the comparison with different time periods is less useful
58
Q

Why is the CPI only measuring changes in consumption on an annual basis a limitation of CPI?

A

changes can occur more frequently
- the index is always behind on these changes

59
Q

Why is the CPI being prone to errors in data collection a limitation of the CPI?

A
  • based on a survey that goes to thousands of households each year, yet is still a small sample
  • respondents have no incentive to fil in the survey carefully and accurately.
60
Q

How is the RPI measured?

A
  • same way as CPI
  • goods excluded from CPI are included in RPI
  • usually higher than CPI due to to additions due to sensitivity to interest rate changes, affected by mortgage interest
61
Q

What is included in RPI that is excluded from CPI?4

A
  • council tax
  • mortgage interest payments
  • house depreciation
  • other house purchasing costs such as estate agents fees
62
Q

What can cause inflation?4

A
  • demand pull inflation
  • cost push inflation
  • increase in the money supply
  • increase in wages
63
Q

What is demand pull inflation?

A

Increase in inflation caused by an excess in AD

64
Q

How is an increase in inflation shown in an macroeconomic diagram?

A
  • if any of the components of AD increase a rightward shift of AD curve occurs
  • at the original P1 a condition of excess demand occurs
  • thus a contraction of AD occurs and an extension of AS
  • the general price level therefore increases
65
Q

What is Cost push inflation?

A

caused by increases in the costs of production in an economy

66
Q

How is cost push inflation shown on a macroeconomic diagram?

A
  • if any of the costs of production increase or a fall in productivity AS will fall causing a leftward shift of AS
  • at the original price there is a condition of excess demand in the economy
  • as the prices rise, AD contracts and an extension of AS occurs
  • causing average price levels to increase from P1 to P2 thus inflation occuring
67
Q

How do changes to the Money Supply cause inflation?2

A
  • by lowering the bank rate
  • by increasing the money supply through quantitive easing
68
Q

How does lowering the bank rate effect inflation?

A
  • increased borrowing by firms and consumers is likely to occur
  • causing an increase in consumption and investment
  • resulting in an increase in AD thus demand pull inflation occuring
69
Q

How does the Central Bank increasing the money supply through quantitive easing cause inflation? 3

A
  • results in increased liquidity
  • lower interest rates
  • likely to lead to a form of demand-pull inflation
70
Q

How do changes to wages cause inflation?

A

Increased AD causes demand pull inflation
- workers feel les well off as wages no longer have the same purchasing power
- workers may demand wage increases to compensate for higher prices
- these wage increases are now a form of cost push inflation driving prices higher
This is an economic phenomena called a wage-price spiral

71
Q

What are the effects of inflation on consumers?3

A
  • decrease in purchasing power
  • decrease in the real value of savings, as money will be worth less in real terms
  • fall in real income, for those on fixed incomes/pensions
71
Q

What are the effects of inflation on Firms? 2

A

uncertainty - rapid price changes create uncertainty and delay investment
menu change costs - price changes force firms to change their menu prices too which can be expensive

72
Q

What are the effects of inflation on the government?

A
  • inflation erodes international competitiveness, of export industries
  • trade-offs involved in tackling inflation, reductions may increase employment +/ reduce economic growth
73
Q

What are the effects of inflation on workers?

A
  • Demand higher wages, to compensate for reduced purchasing power
  • if wage increases inflation, motivation & productivity may fall
74
Q

What makes someone unemployed?

A

not in work but are actively seeking work

75
Q

What does the labour force consist of? 3

A
  • all workers actively working
  • the unemployed
  • between the ages of 16 - 65
76
Q

What does the non labour force consist of?

A
  • all those not seeking work and are out of work
77
Q

what are the 2 methods used in the UK to measure Unemployment?

A
  • International Labour Organisation Survey
  • Claimant count
78
Q

What does ILO stand for?

A

International Labour Organisation

79
Q

What is the ILO and UK Labour Force Survey?3

A
  • extensive survey sent to a random sample of around 60k UK households every quarter
  • respondents self-determine if they are unemployed based of the ILO criteria
  • same survey is used globally thus useful to make international comparisons
80
Q

What is the ILO’s Criteria ?

A
  • ready to work within the next 2 weeks
  • actively looking for work in the past one month
81
Q

What is the Claimant count?

A

Counts the number of people claiming the JSA in the UK
- more stringent requirement to be considered unemployed than with the ILO survey
- requires claimants to meet regularly with a work coach.

82
Q

What does JSA stand for?

A

Job seekers allowance

83
Q

What causes someone to be underemployed?

A
  • they want to work more hours than they currently work
  • working in a job that requires lower skills than they have
84
Q

Why do people become underemployed?

A
  • as a response to cyclical unemployment, losing their jobs in a weak economy can cause them to take part-time jobs or accept roles outside of their main skill base
  • as a consequence of structural unemployment, unless workers retrain and gain new skills it may be difficult to gain full employment
85
Q

What are the 4 commonly used metrics used when analysing the labour market in an economy?

A
  • unemployment rate
  • employment rate
  • labour force participation rate
  • inactivity rate
86
Q

How is the unemployment rate calculated?

A

no. actively seeking work/ total labour force x 100

87
Q

How is the employment rate calculated?

A

no. in employment/ population of working age x 100

88
Q

How is the labour force participation rate calculated?

A

labour force/ total population force x 100

89
Q

How is the inactivity rate calculated?

A

inactive people of working age/ working age population x 100

90
Q

How can the employment rate and unemployment rate increase at the same time?

A
  • increased migration causing working age population to increase
  • decrease in the inactivity rate as people move from being economically inactive to employed
91
Q

Why does the unemployment rate not capture hidden unemployment that occurs in the long term?

A
  • workers look for a job but may eventually give up and become economically inactive
  • improves unemployment rate as fewer people are actively seeking work
92
Q

What are the 4 different types of unemployment?

A
  • structural
  • cyclical or demand deficit
  • seasonal
  • real wage
93
Q

What is structural unemployment? 1+4

A

When there is a mismatch between jobs and skills in the economy
- usually happens as the structure of the economy changes
- no longer a need for a specific type of worker
- perhaps due to relocation of production
- thus unless workers retrain they are left unemployed or underemployed

94
Q

What is cyclical or demand deficient unemployment?

A

Caused by a fall in AD in an economy
- happens during a recession
- demand for labour is demand derived from the demand for goods/services
As output falls in the economy, firms lay off workers

95
Q

What is seasonal unemployment?

A

certain seasons come to an end and labour is not required until the next season

96
Q

What is frictional unemployment?

A

when workers are between jobs
- usually short-term unemployment
- workers have voluntarily left their previous job to search for another

97
Q

What is real wage unemployment?

A

when wages are inflexible at a point higher than the free-market equilibrium wage
- caused by the existence of minimum wage laws
- higher wage created an excess supply of labour
- this represents real wage unemployment

98
Q

Why is migration significant in employment/unemployment?

A
  • labour is a key factor of production
  • a way to expand output in an economy is to increase the amount of labour available
  • achieved through easing the inward migration policies (immigration)
99
Q

What is net migration?

A

the difference between inward migration and outward migration
immigration - emigration
- less developed countries generally have net outward migration (more people going out the coming in)
- more developed economies generally have net inward migration and have skilled workers emigrating

100
Q

What is the significance of migration on employment? 3

A
  • immigrants usually fill fancies that the local citizens cannot or will not fill
  • increased supply of labour may push down wages in the economy, especially for low skilled jobs
    • lower average wages are an incentive for employers to hire more workers
    • employment may increase as a result
  • immigration results in an increased population thus an increase consumption in the economy
    • greater output requires more labour so it creates more jobs
101
Q

What is the significance of unemployment on migration?2

A
  • immigrants may displace local workers increasing the level of unemployment
  • dependents of immigrants may be unable to find work and register as unemployed
102
Q

What are the effects of long term unemployment on government? 3

A
  • increased spending on benefits
  • less tax revenue
  • increased spending on retraining
103
Q

What are the effects of long term unemployment on the economy?4

A
  • increased crime
  • vandalism
  • increased anti social behaviour
  • increased homelessness
104
Q

What are the effects of long term unemployment on individuals?6

A
  • loss of income
  • health issues
  • mental instability
  • sense of failure
  • marital failure
  • stress increases
105
Q

What are the effects of long term unemployment on firms?3

A
  • loss of sales revenue
  • loss of output/ production
  • changes the skill level in the economy
106
Q

What does BoP stand for?

A

Balance of Payments

107
Q

What is the BoP?

A

a record if all the financial transactions that occur between it and the rest of the world

108
Q

What are the two main sections of the BoP?

A
  • the current account
  • the financial & capital account
109
Q

What is the current account?

A

all transactions related to goods/ services along with payments related to the transfer of income

110
Q

What is the financial and capital account?

A

all transactions related to savings, investments and currency stabilisation

111
Q

What is the relationship between the current account and the financial and capital account?

A

should balance and be equal to 0
- thus if one balance is positive he other should be negative

112
Q

What is credit?

A

Money flowing into the country

113
Q

What is debit?

A

money flowing out of the country

114
Q

what does the current account record?

A

the net income that an economy gains from international transactions

115
Q

What is net income?

A

income transfers by citizens and corporations
- credits received from uk citizens who are abroad and send remittances home
- debits are sent by foreigners working the UK back to their countrirees

116
Q

How is the current account balance expressed, and why?2

A
  • expressed as a % of GDP
  • allowing for easy international comparisons
117
Q

When does a current account deficit occur?

A

when the value of the outflows is greater than the value of the inflows
- usually occurs when the imports> exportrs

118
Q

When does a current account surplus occur?

A

When. the value of the inflows is greater than the value of outflows
- usually occurs when imports<exports

119
Q

What is the UK governments aim regarding the current account and how successful have they been?4+1

A

to make it as close to equilibrium as possible
- usually runs a small deficit
- export led growth would help it become positive
- increasing income and wealth in an economy, the value of imports rise
- consumers enjoy the variety of good/services abroad
- rising imports push the balance towards a deficit.

120
Q

What is affected if the current account is running a deficit?1+2

A

a negative impact on aggregate demans
- net exports are a component of AD
- if net exports are negative then AD decreases

121
Q

Hoe could the government correct the current account deficit?1+4

A

By raising tariffs
- decreasing imports bought by households
- firms rely on imports for raw materials used in production, would now face higher costs of production
- higher production costs are passed onto consumers in the form of higher prices
- reducing the deficit causes increased inflation

122
Q

what is the connection of economies through trade?

A

one countries imports are another countries exports
- thus there global value of exports will be equal to the global value of imports

A-Level Economics Edexcel (20 decks)

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