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: Represents he quantity of goods or services sold
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
- Understanding shifts in economy
- 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 comparison of currencies by how much goods and services they can buy
What is the use of PPP-adjusted figures in international comparisons
- Fair income comparison – It helps compare how much people can actually buy with their money in different countries
- 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: doesn’t include unpaid work like voluteering
- 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?
Beyond a certain income level, increased wealth doesn’t significantly improve happiness
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
- Doesn’t account for shift in conusumption
- 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
- Increased Consumer Spending
- Population growth
- Government expenditure
What factors can contribute to cost push inflation
- Raw material prices increasing
- Increased taxes
- Supply chain disruptions (natural disasters)
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
- Makes public services and projects more expensive
- Inflation can raise the cost of loans - harder to manage debt
What is the effect of inflation on consumers
- Reduced purchasing power: their income buys less than before.
- Raises the cost of essential goods
- Savings decrease
- Demand higher wages
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?
measures the number of people claiming unemployment 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
Unemployment is when people are actively seeking but can’t find jobs.
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 actively seeking work
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
deleted
How does unemployment affect firms
- Reduced consumer demand
- Lower productivity
- Increased costs in training
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
- Reduced consumption
- Increased government burden
- Affects quality of life
What is balance of payments
Tracks a country’s financial transactions with the world
What is the current account?
The current account tracks a country’s trade, income, and transfers
What is the current account split into
- Trade in goods/ services
- Trade in net inome from abroad
- 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 (surplus)
country sells more than it buys -> money flows in strengthening its currency -> a stronger currency makes imports cheaper -> reduce inflation by lowering the cost of goods
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)
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)
- Stronger Currency
- More jobs
- Boost in GDP
- More investment since less is spent
How does current account imbalances affect economic growth (deficit)
- Increased debt from borrowing
- Currency depreciation
- Weak domestic industries
How does current account imbalances affect exchange rates (deficit)
local currency is sold to buy foreign currency for imports -> increases the supply of the local currency in the foreign exchange market -> supply rises, the value of the local currency depreciation
Example of Interconnectedness of economies through international trade
Wall street crash: stock market crashed in October 1929, wiping out billions in wealth. consumers in the U.S. lost money and stopped buying as many foreign goods. This meant countries that depended on selling to the U.S. lost income and their economies also started to struggle.
One disadvantage of the Interconnectedness of economies through international trade
Supply Chain Disruptions – If a key manufacturing country faces a crisis it can affect economies worldwide. I.e covid pandemic
One advantage of the Interconnectedness of economies through international trade
Allows countries to specialize in producing what they are most efficient at therefore maximising profits
How does current account imbalances affect inflation (deficit)
country buys more from other countries than it sells -> needs more foreign currency -> weakens its own currency, making imports more expensive -> Higher import prices lead to inflation because businesses pass those costs to consumers.
How does current account imbalances affect exchange rates (surplus)
foreign buyers need to buy the local currency to pay for exports -> increases demand for the local currency in the foreign exchange market -> demand rises, the value of the local currency appreciates
What are the macroeconomic objectives
- Economic growth
- Inflation
- Balance of payments stability
- Income equality
- Sustainable economic spending
- Economic sustainability
- Full employment
