4.2.1 The measurement of macroeconomic performance

Question 1

What is Macroeconomics?

Answer 1

• Refers to study of overall performance of economy
• Deals with overall aggregate effect on Microeconomics.

Question 2

What does GDP measure?

Answer 2

• Measures value of all final incomes earned through production of goods and services in UK
• Also includes foreign owned firms with production plants in UK

3 Ways of calculating GDP- should equal same amount:
National Output= National Expenditure= National Income

Question 3

What are the 6 key Macroeconomic objectives?

Answer 3

Trade balance (balance of payments)
Inflation (low). (target 2%)
Growth; Economic Growth (sustainable) (target 2.5%)
Employment (high) (target 97%)
Redistribution of income and wealth
Stability

Question 4

What are the issues with using GDP to measure Economic Growth?

Answer 4

• Double counting risk (when using output method)
• Informal activity (illegal), not included in GDP figure as not registered- shadow economy

Question 5

What are the issues with using GDP to measure Living Standards?

Answer 5

• Negative externalities- not included in figure, e.g. loss of biodiversitity, cost of air pollution
• Income inequality- doesn’t show distribution of income
• Output produced- production of capital goods may not increase living standards in same way as production of consumer goods

Question 6

What does GDP per capita measure and how is it calculated?

Answer 6

• Average measure of individual income in an economy
• GDP / Population

Question 7

What are the issues with using GDP per capita to measure Economic Growth?

Answer 7

• Remittances- domestic workers leave country and work abroad to earn higher incomes, sent back to home country
• Doesn’t take into account any factor income made abroad
• Influence of FDI and repatriation of profit

Question 8

What does GNI per capita measure and how is it calculated?

Answer 8

• Total income generated by a country’s FoPs, regardless of where those FoPs are located
• GNI= GDP + Net Factor Income
• Net Factor Income- income earned by domestic workers/firms, regardless of where they’re located MINUS income earned by foreign workers/firms at home
• Better measure of living standards and economic growth for developing countries

Question 9

What does Green GDP measure and how is it calculated?

Answer 9

• Accounts for environmental costs of production
• Green GDP= GDP - Environmental Costs

Question 10

What are the issues with using Green GDP to measure Economic Growth?

Answer 10

• Difficult to place Monetary value of environmental costs
• GDP could fall drastically

Question 11

Define Economic Growth.

Answer 11

• Short-run: Increase in Real GDP.
• Long-run: Increase in an economy’s productive capacity.

Question 12

Explain how short-run growth (actual growth) takes place.

Answer 12

• Increase in AD- using spare capacity to increase Real GDP.

Question 13

Explain how long-run growth (potential growth) takes place.

Answer 13

• Increase in LRAS- increase in productive capacity of economy.

Question 14

State the different methods of calculating GDP.

Answer 14

• Output Method- final value of all goods and services produced in economy in a year.
• Income Method- adding all factor incomes earned in a year (e.g. wages, profit, e.t.c.)
• Expenditure Method- investment, gov spending, exports (I + G + M)