2.1 Measures of Economic Performance Flashcards by Ben Holbrook

What’s the difference between real gdp and nominal gdp?

Real GDP is adjusted for inflation.

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What is the volume of gdp?

Size of basket of goods and real level of gdp

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What is the value of gdp?

Nominal figure of GDP prices at day. Calculated by volume x price level

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What is gross national product?

GDP + income earned by overseas assets. Minus income earned by overseas residents

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What is Gross national income (GNI)?

Sum of value added by all producers who reside in a nation

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What is a purchasing power parity?

Currency conversion that aims to equal the purchasing power of different currencies

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What are the limitations of gdp to compare living standards between countries and over time?

GDP does not indicate distribution of income
GDP may need to be recalculated to show international competitiveness
Black markets not counted
No indication of welfare

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What is the UK national wellbeing?

The UK ‘Measuring National Wellbeing’ report includes questions about life
satisfaction, anxiety, happiness and worthwhileness.

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What is the relationship between real incomes and subjective happiness?

Income and happiness positively related to a certain point.

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What is inflation?

Sustained rise in price levels over time

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What is deflation?

Sustained fall in price levels over time

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What is disinflation?

A fall in the rate of inflation

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What is the CPI?

A weighted basket of goods measuring a households purchasing power, based on change of price of goods annually

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Give limitations of CPI

Does not represent goods every household would buy
Different demographics have different spending patterns
Slow to respond to changes in spending
Hard to make comparisons due to tech changes

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What is RPI?

Alternative measure of inflation - includes housing costs (Mortgage payments, council tax) but does not account for consumers switching to cheaper good like CPI does

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What is demand pull inflation?

When AD is growing unsustainably

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What are the main causes of inflation?

Depreciation of exchange rate
Lower taxes or more government spending
Lower interest rates

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What is cost push inflation?

Firms raise prices to cover rising costs

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What are the causes of cost push inflation?

Raw materials become more expensive
Labour becomes expensive
Expectations of inflation
Indirect taxes on fuel etc
Depreciation of exchange rate (Imports more expensive)
Monopolies exploiting market power

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How can the growth of the money supply cause inflation?

If more money ‘printed’, can cause hyperinflation if changes in money supply greater than changes in output

Effects of inflation of consumers

Affects those on low incomes more due to regressive nature
Loan repayments may become lower in real terms

Effects of inflation on firms

High inflation = high interest rates, making borrowing and investment more expensive
Workers may demand higher wages
Less globally competitive
May reduce business confidence

Impacts of inflation on government

Will have to increase value of state pension and welfare payments

Impacts of inflation on workers

Less disposable income
Possible redundancies

What is the claimant count?

Measures the amount of people claiming unemployment related benefits

Problems with the claimant count

Generally underestimates level of unemployment, Not all people that are unemployed will claim benefits

What is the labour force survey?

Measure of unemployment based on following criteria: - Been out of work for 4 weeks - Able and willing to start working within 2 weeks - Workers should be available for 1 hour per week. Part time unemployment is included

What is the difference between unemployment and underemployment?

Unemployed - willing and able to work but have no job Underemployed - Have a job but their labour is not used to full potential

Effects of unemployment on consumers

Less disposable income leading to lower living standards Mental health

Effects of unemployment on firms

More cheap labour available leading to possible reduction in costs However, consumer spending may fall, reducing profits

Effects of unemployment on Workers

Could lose skills if underutilised Wages for those in work may fall as labour supply increases

Effects of unemployment on Government

More Spending on JSA Less revenue from income and indirect taxes

Effects of unemployment on society

Opportunity cost due to goods and services that could be produced if workers employed More crime etc

Explain significance of the economically inactive

Those who are not actively looking for jobs, if number increases, labour force may decrease and productive potential may decrease

What is structural unemployment?

Occurs with long term decline in industries. Effects worsened by geographical and occupational immobility of labour. Can be worsened by globalisation and better technology

What is frictional unemployment?

Time between leaving a job and looking for another job

Seasonal Unemployment

When demands of an industry change with seasons. E.g tourist in summer

Cyclical Unemployment

Lack of demand for goods and services during decline or recession.

Real wage inflexibility

Wages above equilibrium can cause unemployment

What is the significance of migration and skills on employment and unemployment?

Migrants tend to be of working age and looking for employment so increase labour supply. They also tend to bring high quality skills. Migration may drive down low end wages however unlikely. Workers need skills to drive the economy or structural unemployment is risked

What are the components of the balance of payments?

Current account Capital and financial account

How do you work out the balance in trade of goods and services?

Balance of trade + balance of invisibles

What is a current account surplus?

When exports are greater than imports

What is a current account deficit?

When imports are greater than exports

How does high economic growth affect the current account?

Higher AD means more imports, therefore a deficit

How does high unemployment affect the current account?

Lower deficit due to less AD

How could a balanced current account and economic growth be achieved simultaneously?

Export led growth

What is interdependency?

Economies of different countries being affected by each other due to globalisation/trade

What factors are increasing interconnectedness?

More trade Ownership of foreign assets Increasing migration Greater shares of technology