2.1 Measures Of Economic Performance

Question 1

What is economics growth

Answer 1

Economic growth is the rate of change of output. It is an increase in the long term productive potential of country which means there is an increase in the amount of goods and services that a country produces

Question 2

How is economic growth measured

Answer 2

Typically measured by the percentage change in real GDP per annum. It can also be shown though a shift of the PPF

Question 3

What is gross domestic product for

Answer 3

The standard measure of output, which allows us to compare countries. It is the total value of goods and services in a country within a year.

GDP is an indicator of the standard of living in a country

Question 4

What does tot GDP represent

What does GDP per capita represent

Answer 4

Total GDP represents the overall GDP for the country

GDP per capita is the total GDP divided by the number of people in a country

Question 5

Difference between real GDP and nominal GDP

Answer 5

Real GDP strips out the effects of inflation whilst nominal GDP does not

Question 6

What is gross national income

Answer 6

The value of goods and services produced by a country over a period of time plus net overseas interest payments for dividends. This means it adds what a country earns from overseas investments and subtract what foreigners earn in a country and send back home

Question 7

What is gross national product

Answer 7

The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically (GDP) and overseas. The value of all goods produced by citizens of a country’, whether they live in the country or not

Question 8

Why is it important to use GDP per capita numbers instead of just GDP

Answer 8

When country’s have a difference in population, a difference in total GDP doesn’t necessarily mean a difference in living standards so to make comparisons, GDP per capita is used

If a country’s population and GDP grows, this doesn’t mean standard of living has necessarily increased.

Question 9

What is a purchasing power parity

Answer 9

An exchange rate of one currency for another which compares how much a typical basket of goods in the country compared to one in another country

They provide an alternative to using exchange rates for comparisons of GDP

Question 10

Why are PPP’s useful

Answer 10

These are useful when comparing countries as it takes into account the cost of living and so will help us compare better living standards.

Question 11

Why does inaccuracy of data demonstrate a problem of using GDP to compare standard of living

Answer 11

• some countries are inefficient at collecting or calculating data and therefore comparisons less effective
• there is a hidden or black market in which people work without declaring to avoid tax.
• GDP does not take into account home-produced services. (Poor countries farmers may grow their own crops to eat)
• errors in calculating inflation rate

Question 12

Other problems of using GDP to compare standard of living

Answer 12

Inequalities - 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.

Quality of goods and services - the quality is much higher than 50 years ago, but this is not reflected in the price. Therefore, living standards are better off than GDP suggests.

Comparing different currencies - issues over which unit should be used to compare figures. (Usually US dollar)

Spending - some types of expenditure (defence) does not increase SOL but will increase GDP. For example, 1930 UK GDP was higher but SOL wasn’t.

Question 13

What are the 6 key factors that contribute to national happiness

Answer 13

real GDP per capita
Health
Life expectancy
Having someone to count on
Perceived freedom to make life choices
Freedom from corruption
Generosity

Question 14

What is the easterlin paradox

Answer 14

Research shows that happiness and income are positively related at lower incomes

People on lower incomes are more happy with an increase in income than people that make higher incomes

Question 15

What is inflation

Answer 15

The general increase of prices in the economy which erodes the purchasing power of money. Low inflation is generally considered to be better than high inflation

Question 16

What is deflation

Answer 16

The fall of prices and indicates a slowdown in the rate of growth of output in the economy which erodes

Question 17

What is disinflation

Answer 17

A reduction in the rate of inflation. Prices are still rising but not as much

Question 18

What is the consumer price index

Answer 18

The ONS collects prices in 710 goods and services from 20k shops in 141 locations

All these prices are combined using information on the average household spending pattern to produce an overall price index

It takes into account how much is spent on each item so they are weighted I.e spend more on petrol than postage stamps so increase in petrol will have an overall bigger impact on inflation

Question 19

Limitations of the CPI

Answer 19

• impossible to take into account every good that is sold so therefore it is not totally representative
• does not include the price of housing and housing has tended to rise more than other goods
• more recent than the RPI, therefore, it is difficult to make comparisons with historical data.

Question 20

Why is it argued that all inflation indices overestimate inflation

Answer 20

They don’t take into account the fact that goods and services have improved in quality, and so obviously will be more expensive.

Question 21

What is the retail price index

Answer 21

Very similar to CPI, but differences between data included and how calculated

• RPI takes into account housing costs such as mortgage and interest payments and council tax, whereas CPI does not
• RPI excludes the top 4% of income earners and low income pensioners as they are not ‘average households’

RPI is not longer considered as the best method and has had its national statistic status removed

Question 22

What is demand pull (causes of inflation)

Answer 22

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

Question 23

What is cost push (causes of inflation)

Answer 23

Whilst an increase in aggregate demand can push prices up, a decrease inn aggregate supply may also push prices up
When businesses find their costs have risen, they will put up prices to maintain their profit margins.

Question 24

What is growth of money supply (causes of inflation)

Answer 24

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.

Question 25

Effects of inflation on consumers

Answer 25

• if people’s income 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 cheaper of value, but those who are owed money lose because the money they get back is cheaper value. Consumers who have saved will lose out as their money is worth less
• inflation has a psycological effects on consumers: because prices are rising, they may feel less well off, even if their incomes is rising in line with inflation, and so this may cause them to decrease their spending

Question 26

Effects of inflation on firms

Answer 26

• 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, also effecting the BOP
• deflation isn’t good as it encourages people to postpone their purchases as they wait for the price to further.
• in general inflation/deflation/disinflation is difficult to predict and so this means that firms cannot plan for the future
• firms will have to change their prices which will lead to changing their menus, labelling etc… increased printing costs

Question 27

Effects of inflation on governments

Answer 27

If the government fails to change exude taxes in line with inflation then real government revenue will fall. However, if they fail to change personal income tax allowances then real government income will increase and taxpayers will have less money

Question 28

Effects of inflation of workers

Answer 28

• If workers do not receive yearly pay rises of the rate of inflation, they will be worse off and their living standard will decrease.
• 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 29

Define unemployment

Answer 29

Those of working age who are without work, able to work and seeking work and have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks

Question 30

What is the claimant count

Answer 30

The claimant count is the number of people receiving benefits for being unemployed. It provides the number of claimants on particular day each month and the numbers joining and leaving the count each month

Question 31

Define employed

Answer 31

The hose who do more than 1 hour of paid work a week or are temporarily away from work, are in a government supported training scheme or dk minimum 15 hours of unpaid work for its family business

Question 32

What does it mean to be inactive

Answer 32

Those who are neither employed nor unemployed. They are people of working age not seeking employment as well as those seeking employment but not able to start wirk

Question 33

What is the labour force survey

Answer 33

A sample of people living in households and is a legal requirement survey for every country in the EU. It asks questions about personal circumstances and activity in the labour market to class people as employed, unemployed, and inactive.

Question 34

Comparisons between the claimant count and LFS

Answer 34

• some people may not be included in the LFS unemployment measure but would be in the claimant count. These may be people working in the hidden economy or those who fraudulently claim benefits
• some people are not eligible for benefits but are classed as unemployed so would appear in the LFS but not the claimant count
• LFS tends to be higher than the claimant count
• sometimes they can be going in different direction. 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

Question 35

What does the claimant count and LFS not include

Answer 35

• working part time but would like to work full time
• on government training schemes who would prefer employment
• classed as sick or disabled
• who aren’t actively looking for jobs but would take a job if offered or in education because they can’t get a job

These are the hidden unemplyed

Question 36

Who counts as the economically active
Who counted as the workless

Answer 36

Economically active are the employed and unemployed

The workless are the unemployed and inactive

Question 37

What is the employment and rate and the unemployment rate

Answer 37

The employment rate is the percentage of the population of working age who are employed

The unemployment rate is the percentage of the economically active who are unemployed

Question 38

What is underemployment

Answer 38

• those who are in part time or zero hour contracts when they would prefer to be full time and people who are self-employed but would rather be employees
• those in jobs that do not reflect their skill level. Accountant working in a bar
•tends to increase during recessions

Question 39

What happens with an increase in inactivity

Answer 39

An increase in inactivity will decrease the size of the labour force, therefore causing a fall in productive potential of the country

Question 40

What happens with a decrease in inactivity

Answer 40

An decrease in inactivity could just result in more people being unemployed if there are no jobs available to them

Question 41

What is frictional unemployment and what is its severity

Answer 41

• when people are moving between jobs. This could be due to new workers entering the labour market or people have chosen to leave their previous job
• not a serious problem as only short term

Question 42

What is structural unemployment and its severity

Answer 42

•Much more serious form of unemployment. It is a long term decline in demand in an industry leading to reduction in employment
• the lack of geographical and occupational mobility means that people will remain unemployed

Question 43

What are the different types of unemployment

Answer 43

Regional unemployment - where certain areas of the country suffer from very low levels of employment due to industry closures

Sectoral unemployment - where one sector suffers a dramatic fall in employment

Technological unemployment - where an improvement in technology means that jobs are replaced

Question 44

What is seasonal unemployment

Answer 44

Some employment is strongly seasonal in demand. Industries such as tourism are only prominent during certain times of the year so only demand large numbers of workers at a specific time
There is little that can be done to prevent this from occurring in a free-market economy

Question 45

What is cyclical unemployment

Answer 45

Unemployment due to a general lack of demand of goods and services within the country

When there is a recession or severe slowdown in economic growth, we see rising unemployment due to plant closures, business failures and an increase in worker layoffs and redundancies

Question 46

What is real wage inflexibility

Answer 46

This is unemployment considered to be the result of real wages being above their market clearing level leading to a Excess supply of labour

It can also be caused by unemployed workers refusing to take low paid jobs because they can receive more in welfare benefits

Question 47

+ and - effects of migration

Answer 47

Leads to increased jobs.

However, leads to lower wages, particularly for lower-paid, lower-skilled jobs.

Question 48

Effects of skills in the economy

Answer 48

As economies progress over time, higher skills are needed to work in them

For example, 50 years ago many jobs for those who didn’t read or write. Now, barely any

Question 49

Impacts of unemployment on workers

Answer 49

• those who are made unemployed normally have a loss of income which Ususally results in a decline in their living standards
• they often suffer stigma of being unemployed and feel degraded by the process of signing onto receive benefits to support their family
• long term unemployed often find it more difficult to get another job as they lose skills
• those who are in jobs will suffer from lower job security and will fear being made redundant

Question 50

Impact of unemployment on firms

Answer 50

• tend to be a decrease in demand for their goods and so this could lead to a fall in profit
• 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
• they can offer low wages and people will take the job anyway because tbh know there is a lack of jobs so have few options

Question 51

Impact of unemployment on consumers

Answer 51

• consumers in areas of high unemployment lose out because local shopping centres tend to be run down and don’t offer the range of shops available to those in areas of low unemployment. Suffer from less choice
• the unemployed consumers lose out as they have less available to spend
• however, firms may lower prices and put in sales in order to increase demand for their product

Question 52

Impact of unemployment on the government

Answer 52

• the reduced income results in a fall in tax revenues and higher spending on welfare payments for families with people out of work, incurring an opportunity cost as the money could be spent better elsewhere

Question 53

Impact of unemployment on society as a whole

Answer 53

• rising unemployment is linked to socks deprivation. There is a relationship with crime and social dislocation
• areas of high unemployment often see a 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
• results in a loss of potential national output and represents an inefficient use of scarce resources

Question 54

What is the balance of payments

Answer 54

The balance of payments is a record of all financial dealings over a period of time between economic agents of one country and all other countries. Imports are when goods and services come in, so money goes out. Exports are when money comes in, so the goods and services go out

Question 55

What are the components of the balance of payments

Answer 55

The BOP is made up of the current account which records payments for the purchase and sale of goods and services, and the capital and financial account which records flows of money associated with saving, investment, speculation and currency stabilitation

Question 56

What is the trade in goods section of the current account

Answer 56

Trade in goods - these are known as visible because you can physically see them. They are goods that are traded, whether raw materials or finished goods the difference between visible exports and visible imports is known as the balance or trade

Question 57

What is the trade in services section of the current account

Answer 57

These are services traded in or out of the country, known as invisibles. A holiday to Spain by a British family is an invisible import as money leaves the UK to go to Spain

Question 58

What is income in the BOP

Answer 58

Income includes earnings from investments such as dividends, interest, and profits, received from foreign investments and paid to foreign investors by domestic entities

Question 59

What is transfers in the BOP

Answer 59

Transfers encompass unilateral transfers of money or goods between countries, such as foreign aid, remittances from expatriates, and gifts

Question 60

What is the current balance

Answer 60

Balance of trade + balance of invisibles + net income and current transfers

Question 61

What are the 4 macroeconomic objectives

Answer 61

Low unemployment
Low and stable inflation
Economic growth at a similar rate to other economies
Balance of payment at equilibrium

Question 62

what are four key ways that have led to globalisation

Answer 62

• the proportion of output of an individual economy which is traded internationally is growing
• many more people own assets in other countries such as shares, loans or businesses
• there is increasing migration between countries
• more technology being shared on a faster basis