2.1 Measures of Economic Performance Flashcards
What is economic growth?
Economic growth is the rate of change of output. It is an increase in the long term productive potential of the country which means there is an increase in the amount of goods and services that a country produces.
How is economic growth typically measured?
The percentage change in real GDP per annum. It can also be shown through the shift of PPF
What is Gross Domestic Product?
The standard measure of output, which allows us to compare countries. It is the total value of goods and services produced in a country within a year
Is real or nominal GDP adjusted for inflation?
Real values are adjusted for inflation, nominal are not
What is Gross National Income?
The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends. This means that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home from the GDP. It is affected by profits from businesses owned overseas and remittances sent home by migrant workers.
This is increasingly used rather than GDP because of the growing size of remittances and aid
What is Gross National Product?
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. This means it is the value of all the goods produced by citizens of a country, whether they live in the country or not, whilst GDP is the value of all goods produced inside the country, whether they were produced by citizens of the country or not.
What are purchasing power parities?
An exchange rate of one currency for another which compares how much a typical basket of goods in the country costs compared to one in another country
How can there be inaccuracies with data when using GDP to compare living standards?
● Some countries are inefficient at collecting or calculating data, comparisons can become less effective.
● There is a ‘hidden’ or ‘black’ market in which people work without declaring their income to avoid tax or to continue claiming benefits, and so GDP is underestimated
● GDP does not take into account home-produced services, for example in many poorer countries people work as subsistence farmers where they grow and consume their own crops without trading, and so the GDP is underestimated. This can also be true in the UK where DIY or the service of house-wives/husbands are not recorded.
● Over time, methods used to calculate GDP will change and so therefore it can be difficult to compare countries overtime. Similarly, different countries may use different methods to calculate their GDP.
● It is important to take away transfer payments, when money is paid to a person without any corresponding increase in output in the economy. E.g. the government taxes people who are employed and then gives it straight to the people who are unemployed. Other examples include pocket money and selling second hand goods.
● Errors in calculating the inflation rate means real GDP will be slightly inaccurate.
How do inequalities make it difficult to use GDP to compare living standards?
An 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. Income distribution changes overtime and varies between countries so makes comparisons difficult.
How do the quality of goods and services make it difficult to use GDP to compare living standards?
The quality of goods and services is much higher than those fifty years ago, but this is not necessarily reflected in the real price of these goods and services. Therefore, living standards may have increased more than GDP would suggest since the quality of goods and services has improved greatly. Improved technology may allow prices to fall, suggesting falling living standards, when this is not the case.
How does comparing different currencies make it difficult to use GDP to compare living standards?
There are issues over which unit should be used to compare figures: they are usually converted into US dollars because of the size of the American economy. Some people argue that Purchasing Power Parity should be used to take into account the impact of differences in the cost of living in different countries.
How does spending make it difficult to use GDP to compare living standards?
Some types of expenditure, such as defence, does not increase standard of living but will increase GDP
For example, the GDP of the UK was higher during the Second World War than in the 1930s because a lot of money was spent on defence which increased GDP but it is difficult to argue that standard of living was higher in the Second World War. This therefore makes comparisons difficult as spending varies overtime and between countries.
When was the Measuring National Wellbeing report launched in the UK and what was it for?
In 2010, the UK Prime Minister launched the Measuring National Wellbeing report to measure how lives are improving
They found that self-reported health, relationship status and employment status most affect personal well-being.
What questions are asked in the Measuring National Wellbeing report in the UK?
They ask 4 key questions about:
● life satisfaction
● anxiety
● happiness
● worthwhileness
People answer on a scale of 0 ‘not at all’ to 10 ‘completely’
The report is now updated on a quarterly basis, rather than annually.
What were the findings of the Measuring National Wellbeing report?
In 2012-2016, life satisfaction, happiness and worthwhile have continued to rise whilst anxiety levels fell but have begun to rise slightly
This could be as unemployment is falling/GDP is rising but concerns over global security could be causing anxiety
What is the link between real incomes and subjective happiness?
One key finding of psychological research is that happiness and income are positively related at low incomes, but higher levels of income aren’t associated with increases in happiness. This is called the Easterlin Paradox
An increase in consumption of material goods will increase happiness if basic needs aren’t met, but once these needs are met, an increase in consumption won’t increase long term happiness
What is the Easterlin Paradox?
A phenomenon identified by economist Richard Easterlin in the 1970s, in which increases in a country’s per capita income do not necessarily lead to increased happiness or life satisfaction among its citizens. Easterlin observed that while people in countries with higher incomes tend to report higher levels of happiness, within a given country, there is often little direct relationship between income and happiness.
What is inflation?
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
What is deflation?
A decrease in the general price level of goods and services
The fall of prices and indicates a slowdown in the rate of growth of output in the economy
What is disinflation?
A reduction in the rate of inflation i.e. prices are still rising but they are not rising by as much.
How is CPI calculated?
What are some limitations of CPI?
● It is impossible for the figure to take into account every single good that is sold in the country, not totally representative. Similarly, different households spend different amounts on each good
● Doesn’t include the price of housing, since this has tended to rise more than the price of other goods, the data may be lower than it should be.
● The figure is more recent than RPI, difficult to make comparisons with historical data. It was only used since 1996 with estimates going back to 1988 which means that levels of inflation using CPI can only be accurately compared back to then.
What are some differences between RPI and CPI?
● RPI includes housing costs such as mortgage and interest payments and council tax, whereas CPI does not.
● CPI takes into account the fact that when prices rise people will switch to product that has gone up by less. Therefore, the CPI is generally lower than the RPI.
● RPI excludes the top 4% of income earners and low income pensioners as they are not ‘average’ households whilst CPI covers all households and all incomes.
What are the two types of inflation?
● Demand pull inflation
● Cost push inflation
