2.1 measures of economic performance Flashcards
what is gdp
gross domestic product
total value of national output of goods and services
what 3 ways can gdp be caluclated
expenditure
output
incomes
what is economic growth (long and short run)
short run - the increase in real value of goods and services produced.
measured by annual % change in gdp
long run - an increase in the countries productive capacity / potential output
real and nominal values
nominal values are current prices
real values take inflation into account - gdp is adjusted for changes in the price level
gni
gross national incpme -
gdp + net property income from overseas
what is gni used for
calculating the income component of the hdi (human development index)
what is ppp
purchasing power parity
how many units of one country’s currency is needed to buy the same basket of goods as can be bought with a given amount of another currency.
less developed countries have lower ppps meaning the same amount of currency goes further than the in the us
The limitations of using GDP to compare living standards between
countries over time
GDP does not give any indication of the distribution of income
GDP may need to be recalculated in terms of purchasing power
There are also large hidden economies, such as the black market, which are not
accounted for in GDP.
GDP gives no indication of welfare. Other measures, such as the happiness index,
might be used to compare living standards instead or in conjunction with GDP.
what is the relationship between real incomes and subjective happiness
The UK economy grew by 5% in GDP per capita between 2007 and 2014, but
showed no change in life satisfaction. However, generally, the higher the GDP
per capita, the higher the average life satisfaction score
Inflation
the sustained rise in the general price level over time. This means that
the cost of living increases and the purchasing power of money decreases.
Deflation
opposite do inflation - where inflation rates fall to negative
average price levels fall
Disinflation
the falling rate of inflation. This is when the average price level is still
rising, but to a slower extent. This means goods and services are relatively cheaper
now than a year ago
Calculating the inflation rate in the UK
This is done using the Consumer Prices Index (CPI). It measures household
purchasing power with the Family Expenditure Survey. The survey finds out what
consumers spend their income on. From this, a basket of goods is created. The goods are weighted according to how much income is spent on each item. Each year, the basket is updated to account for changes in spending patterns.
Limitations of CPI when measuring inflation
The basket of goods is only representative of the average household, so it is not
accurate for households who do not own cars, for example, and therefore do not
spend 14% of their income on motoring.
Different demographics have different spending patterns.
CPI is slow to respond to new goods and services, even though it is updated
regularly.
Retail Price Index (RPI)
alternative measure of inflation, takes into account housing costs so is higher and more representative then cpi
Causes of inflation
cost push
demand pull
Growth of the money supply
demand pull
When aggregate demand is growing unsustainably, there is pressure on resources. Producers increase their prices and earn more profits.
cost push
This is from the supply side of the economy, and occurs when
firms face rising costs. This occurs when:-
Raw materials become more expensive, such as when oil prices rise.-
derived demand becomes more expensive.
growth of money supply
if the BoE prints more notes the value of the currency would go down
