2.1 Measures of economic performance Flashcards
2.1.1 - 2.1.4
What is economic growth?
The increase in a countries real GDP over time
What does economic growth signify?
The expansion of an economies production capacity and overall economic health
How do you measure economic growth?
Percentage change in real GDP over a specific period
What is the formula for growth rate
[(GDP at time 2 - GDP at time 1) / GDP at time 1] x 100
What is the difference between nominal and real values
Real: Adjusted for inflation
Nominal: Not adjusted for inflation
What is the difference between Total and Per capita
Total: Represents the aggregate sum of a variable
Per Capita: Represents the average amount per person
What is the difference between Value and Volume
Value: Represents the monetary worth of goods and services
Volume: Measures the physical quantity of goods and services
What is GNI?
Gross national income: includes the total income earned by a country’s residents and businesses
What is the difference between GNI and GDP
GNI includes foreign income while GDP measures domestic production
Benefits of comparing growth rates between countries
- Helps assess relative economic performance
- Reveals disparities in in development
Benefits of comparing growth rates over time
- Reveals economic patterns and trends
- Identifies periods of economic expansion, recession or stagnation
What is economic expansion
When a country’s economy grows, increasing output.
What is a recession
A significant economic decline in activity and output over 2 quarters
What is stagnation
A period of little or no economic growth.
What is does PPP stand for and what is it
Purchasing power parities: The exchange rate needed to buy the same quantity of products in each country
What is the use of PPP-adjusted figures in international comparisons
- Allows for more accurate comparisons of economic indicators like GDP and income across nations.
- Reflects what people can buy with their money showing standard of living and economic productivity
What are the limitations of using GDP to compare living standards
- Income distribution: doesn’t account for income inequality
- Non-market activities: excludes activities like hold labour and informal economies
- Quality of life: GDP doesn’t measure factors like healthcare and well-being
What is UK National Wellbeing
Measures overall life quality, including health, relationships, and satisfaction, beyond traditional economic indicators like GDP.
What is the Easterlin paradox?
Debates on if a country’s per capita income leads to increased happiness or life satisfaction among its citizens.
What is inflation?
An increase in the general price level of goods and services
What is deflation?
A decrease in the general price level
What is disinflation?
Decrease in the rate of inflation
How is inflation measured in the UK
CPI
What is the UK’s target inflation rate?
2% (flexibility of -1/+1)
Who is responsible for controlling inflation
The bank of England
How do you calculate CPI inflation?
[(Current CPI - Previous CPI) / Previous CPI] × 100
What are the limitations of CPI
- CPI assumes consumption patterns leading to overestimation
- Doesn’t account to quality improvements
- Excludes non-market transactions
What is an alternative measure of inflation and how is it different to CPI
RPI: it includes housing costs
What is demand pull inflation
As aggregate demand increases prices for these goods and services increase
What is cost push inflation
As more money is put into production the price of the the good and service also increases
What factors can contribute to demand-pull inflation
- Consumer spending
- Business investment
- Government expenditure
What factors can contribute to cost push inflation
- Raw material prices
- Higher wages
- Supply chain disruptions (interrupting the flow of goods and services)
What is meant by a ‘growth of the money supply’
An increase in the money supply, without a similar rise in economic output, can create excessive demand for goods and services, leading to inflation.
What is the effect of inflation on consumers
- Erodes purchasing power of money reducing the real value of savings
- Increased cost of living
- Uncertainty in spending a=causing consumers to delay purchases
What is the effect of inflation on firms
- Higher production costs reducing profit margins
- Prices may be increase for consumers to maintain profit
- Employees may demand for more increasing labour costs
What is the effect of inflation on the government
- If inflation rises, interest rates often follow increasing borrowing costs
- Inflation can raise the cost of managing government debt, reducing funds available for other public spending needs.
What is the effect of inflation on workers
- While workers may see nominal wage increases, their real wages may decline due to inflation.
- Labour unions may negotiate for higher wages to keep pace with rising prices.
What is employment
The proportion of the working age population that is working
How many people were employed in 2021
34 million
What is the working age population
16-64
What is Claimant count?
A measure of unemployment based on the number of people who are claiming unemployment-related benefits,
What is ILO
International Labour Organisation: defines unemployment as individuals of working age who are without work, actively seeking work, and available for work.
What is unemployment
Individuals who are not currently employed but are actively seeking and available for work
How many people were unemployed in 2021
1.6 million
What is underemployment
Are employed but their job does not fully utilize their skills and qualifications or are seeking more hours
What does employment rate measure and what does it indicate
The proportion of the working-age population in employment
What does unemployment rate measure
The proportion of the labour force actively seeking work
What does inactivity rate measure
The proportion of the working-age population that is not in the labour force.
What is the labour force
All those who are able and willing to work
What is structural unemployment
Mismatch between the skills of the workforce and the requirements of available jobs.
What is frictional unemployment
Temporary unemployment during transitions between jobs or career changes
What is seasonal unemployment
Temporary job loss due to seasonal changes in labour demand
What is cyclical unemployment
Joblessness caused by reduced demand for goods.
What is geographic unemployment
Joblessness caused by workers’ relocation to areas with fewer jobs
What is real wage inflexibility
When wages are too high, leading to job cuts or an unwillingness to hire
How does migration and skills impact employment
- Migrants can fill labour shortages
- Provide a variety of skills and expertise
How does unemployment affect consumers
Reduced income can lead to lower consumer spending, impacting businesses
How does unemployment affect firms
- High unemployment increases the number of available workers, which can lower wages therefore
- When unemployment is high, consumer spending is lower, which can reduce a business’s revenue
How does unemployment affect workers
- Lost income
- Skill deterioration
- Psychological stress
How does unemployment effect governments
Less income tax is payed -> therefore reduces the government spening
How does unemployment effect society
- Pushes people into poverty
- Increased crime rates
- Affects quality of life
What is balance of payments
A record of all financial transactions between a country’s economic agents and other countries over time.
What is the current account?
The main measure of external trade performance
What is the current account split into
- Trade in goods
- Trade in services
- Income transfers
- Current transfers
What is a current account deficit
When a country’s imports of goods, services, income, and transfers exceed its exports
What is a current account surplus
When a country’s exports of goods, services, income and transfers exceed its imports
Give an example of a country with a current account deficit
US
Give an example of a country with a current account surplus
Germany
How does current account imbalances affect inflation
A depreciating currency, often due to a trade deficit, means that the currency loses value against others. This makes imported goods more expensive since businesses need to spend more of their currency to buy the same products from abroad.
How does current account imbalances affect employment (surplus)
Surplus: Boosts job creation in industries focused on exports, such as manufacturing or agriculture → these industries need more workers to produce goods for foreign markets
How does current account imbalances affect employment (deficit)
This can hurt domestic industries that compete with imports, leading to job losses → If cheaper foreign products enter the market local companies find it harder to compete → causes layoffs
How does current account imbalances affect economic growth (surplus)
Can increase savings and investment, which helps boost economic growth.
How does current account imbalances affect economic growth (deficit)
Long-term trade deficit may result in excessive borrowing, which is not sustainable
How does current account imbalances affect exchange rates
Persistent current account deficit can cause a country’s currency to lose value → exports become cheaper for foreign buyers and boosting demand for them → reduces the deficit
2. imports become more expensive → leads to consumers buying more local products instead → corrects the deficit
Example of Interconnectedness of economies through international trade
One country’s economic policies and developments can have ripple effects globally
Example: The 2008 financial crisis in the United States had global repercussions, as it led to reduced demand for imports from other countries, affecting their economic growth.
One disadvantage of the Interconnectedness of economies through international trade
Supply chain integration: Many products involve components from multiple countries. Disruptions in one country can disrupt global supply chains. Example: COVID-19 pandemic disrupted supply chains worldwide, affecting industries from electronics to pharmaceuticals.
One advantage of the Interconnectedness of economies through international trade
Allows countries to specialize in producing what they are most efficient at,
Example: Switzerland specializes in the production of high-quality watches, benefiting from a strong reputation in the global market.
