2.1 Measures Of Economic Performance

Question 1

Define GDP and rGDPR

Answer 1

This is the total amount of goods and services produced in an economy in a given time period.

Real GDP, is GDP, adjusted for inflation.

Question 2

What is economic growth and what is potential growth

Answer 2

Economic growth is an increase in rGDP, and this is also called actual growth.

Potential growth is an increase in the productive potential of the economy. This can be shown by an outwards shift of the PPF.

Question 3

What is a recession ?

Answer 3

This is 2 quarters of consecutive negative economic growth.

Question 4

What is GNI?

Answer 4

Gross National Income (GNI) includes everything in GDP but also adds net income from abroad (income earned by residents and businesses from foreign investments minus income earned by foreign entities within the country). It reflects the total income of a country’s residents, regardless of where they earn it.

Question 5

What are the disadvantages of using GDP as a measure to compare living standards?

Answer 5

1. Doesn’t Account for Income Distribution
   GDP measures total production, but it doesn’t show how wealth is distributed. A high GDP might hide extreme inequality, where only a small portion of the population benefits.
2. Ignores Non-Market Activities
   Many essential activities, like household work and volunteer services, are not included in GDP, even though they contribute to well-being. (Cash in hand)
3. Fails to Consider Environmental Costs
   Countries with high GDP may have severe environmental degradation. Pollution, deforestation, and resource depletion are not deducted from GDP, making growth look better than it really is.
4. Doesn’t Reflect Differences in Cost of Living

A high GDP in one country may not mean better living standards if the cost of living is much higher compared to another country. Purchasing Power Parity (PPP) adjustments are often needed.

5. Doesn’t Measure Quality of Life
   GDP ignores factors like health, education, safety, and happiness. A country with high GDP may still have poor healthcare, high crime, or political instability.
6. Can Be Affected by Population Size
   Larger countries naturally have higher GDP, but this doesn’t mean better living standards. GDP per capita (GDP divided by population) is a better measure but still has limitations.

Question 6

Define inflation, deflation and disinflation

Answer 6

Inflation is a sustained increase in the general price level.

Deflation is a sustained FALL in the general price level. This is when inflation is still occurring, but at a slower rate.

Disinflation is when inflation turns negative and prices are now falling.

Question 7

The process of calculating cpi and what are the problems of using the cpi to measure the rather of inflation?

Answer 7

• a family expenditure survey is sent to households, where households track what they are spending on and how much they are spending on.
• the most popular goods and services are collect5ed and put into an imaginary basket and weights are attached. The weights are attached according to the proportion of income spent on the goods and services.
• A base year is then pickled and given an index of 100
• We can then generate index numbers and can calculate a change in the price.

Problems :
- The basket may not be representative of all consumers since not ALL households receive the survey
- The data comes from a survey and consumers may not fill their survey accurately

Question 8

What are the disadvantages of inflation

Answer 8

• lower purchasing power for consumers
• lower export competitiveness
• wage price spirals ( workers bargain for higher wages due to suffering from higher prices and this leads to high costs of production for firms, which leads to higher prices which increases inflation further and the process continues)
• Consumer price spirals ( Consumers will see higher prices and in fear of even higher prices they will bulk buy leading to a huge increase in AD, causing an even further increase in inflation.)
• Fiscal drag ( when there is inflation, consumers bargain for and receive higher wages, leading to them being forced into a higher tax band, meaning their disposable income is eroded leading to a fall in living standards)

Question 9

What are the benefits for consumers ?

Answer 9

• Consumers can bargain for an increase in wages
• Firms will b encouraged to increase output, since they can charge higher prices and receive higher revenue, and this means they will expand and employment will increase.
• fall in the real value of national debt and debts will be less of a burden