2.1 Measures of Performance

Question 1

Gross Domestic Product

Answer 1

The market value of all final goods and services produced in a country in a time period

One of the key measures of economic performance is GDP
Measured every quarter (3 months)

Question 2

Measuring GDP formula

Answer 2

GDP = C + I + G + NX

Question 3

Circular Flow of income

Answer 3

Model showing the operation of an economy and the flow of income and goods/services between different components of an economy

Question 4

Circular Flow of income: Households

Answer 4

Receive income through wages and salaries from their jobs and investments and buy goods and services supplied by firms

Question 5

Circular Flow of income: Businesses

Answer 5

Hire land, labour and capital when making products to then pay wages and rent. Firms receive payment from consumers.

Question 6

Circular Flow of income: Government

Answer 6

Collect taxes to fund spending on public services (Leakages)
Also spend as state spending (Injections)

Question 7

Circular Flow of income: External Sector

Answer 7

The UK imports from other countries (M) and overseas businesses and consumers buy UK products (Exports- X)

Question 8

Nominal GDP

Answer 8

GDP given without taking inflation into account

Question 9

Real GDP

Answer 9

GDP given taking inflation into account

Question 10

Purchasing Power Parity

Answer 10

Economists take a basket of goods and see how expensive they are in each country

Question 11

Issues with GDP: The Black Market

Answer 11

The shadow economy refers to money earned from illicit activities like prostitution and the sale of illegal drugs, avoids tax

Question 12

Issues with GDP: Non Market activities

Answer 12

GDP missing home production and voluntary work:
Caring for a relative
Volunteering for a charity
Growing food on your garden
Chores in the house

Question 13

Issues with GDP: Environmental Factors

Answer 13

GDP is poor at recognising external costs like pollution, congestion and global warming

Question 14

Issues with GDP: Happiness and Well-Being

Answer 14

GDP makes no adjustment for happiness, which should take into account how hard people work, stress and impact on family life

Question 15

Issues with GDP: Stability of Growth

Answer 15

GDP does not measure sustainability of growth, a country may achieve a temporarily high GDP by over-exploiting natural resources by misallocating investment

Question 16

Issues with GDP: Balance of GDP

Answer 16

Some countries large amounts of GDP may be spent on arms industry while others may spend money on health and education

Question 17

Inflation

Answer 17

When the avg price of goods and services is rising over a period of time

Question 18

Deflation

Answer 18

Negative Inflation, when avg prices are falling over time

Question 19

Disinflation

Answer 19

Occurs when inflation is slowing down- prices are still rising but at a slower rate

Question 20

How is inflation measured?

Answer 20

Gov measures inflation by tracking the prices of a typical basket of goods every month
Called the consumer price index (CPI)

Question 21

Limitations of CPI

Answer 21

The CPI is not representative of everyone- inaccurate for the ‘non typical’ household
New products- Slow to respond to new products
Changing quality of goods and services- Prices may rise for a good reason

Question 22

Demand Pull inflation

Answer 22

Caused by excess aggregate demand

Question 23

Cost push inflation

Answer 23

Rising costs mean that the selling prices increase

Question 24

Money Supply

Answer 24

If the supply of money is increased then the prices will
This happens when gov prints money to pay for goods and services

Question 25

Internal causes of inflation

Answer 25

A large surge in property prices Lower wages/ labour costs Boom in credit/ Money supply Rise in VAT

Question 26

External causes of inflation

Answer 26

Increase in world oil/ gas prices Inflation in global commodity prices Depreciation of the exchange rate Lower inflation in other countries

Question 27

Why is High inflation an Economic Problem?

Answer 27

Falling real incomes- Workers worse off if wage increase is less Cost of borrowing increases Risks of wage inflation- leads to rising labour costs and lower profits Business competitiveness Business Uncertainty

Question 28

Winners from high inflation

Answer 28

Workers with strong wage bargaining power Borrowers if real interest rates are negative Producers if price rise faster than costs

Question 29

Losers from high inflation

Answer 29

Retired on fixed incomes Lenders if real interest rates are negative Savers if real returns are negative Workers in low paid jobs

Question 30

Real interest rates formula

Answer 30

Real interest rates = Nominal Interest Rates- Inflation Rate

Question 31

Unemployment

Answer 31

When you are able, available and willing to work and are actively seeking work- but not employed

Question 32

Labour force

Answer 32

The total of all active population, both employed and unemployed

Question 33

Unemployment rate

Answer 33

The no. unemployed as a percentage of the labour force

Question 34

Potential labour supply

Answer 34

The total amount of people who are able to work

Question 35

Claimant Count

Answer 35

The no. people claiming the jobseekers allowance

Question 36

Labour force Survey

Answer 36

Measures the total unemployment

Question 37

Economic Costs of unemployment for businesses

Answer 37

Fall in demand for goods and services Reduction in sales/ profits Depends on whether good is normal or inferior

Question 38

Economic Costs of unemployment for government

Answer 38

Increased spending on unemployment benefits Fall in revenue from income tax and VAT Fall in corporation taxes May lead to a greater budget deficit

Question 39

Economic Costs of unemployment for economy as a whole

Answer 39

Lost output from people being out of work Some of the long term unemployed may never become employed again Increase in the inequality

Question 40

Trade

Answer 40

Involves the buying and selling goods and services with other countries

Question 41

Imports

Answer 41

The purchase of goods and services from abroad

Question 42

Exports

Answer 42

The sale of goods and services to buyers in other countries

Question 43

Balance of Payments

Answer 43

A record of transactions between one country and rest of the world. Records exports and imports as well as transfers of income and assets.