4.2.1 The measurement of macroeconomic performance

Question 1

What are the main objectives of government macroeconomic policy?

Answer 1

Economic growth, 2% inflation (price stability), low unemployment, stable current account on the balance of payments

Question 2

What can happen, at least in the short run, when attempting to achieve the main objectives of government macroeconomic policy?

Answer 2

Conflicts arising

Question 3

What is short run growth also known as?

Answer 3

Actual growth

Question 4

What is short run growth?

Answer 4

Each year’s change in real GDP

Question 5

What is nominal GDP (Gross Domestic Product)?

Answer 5

The total value of all output in an economy in a year

Question 6

What is real GDP?

Answer 6

The GDP adjusted for inflation

Question 7

What is long run growth also known as?

Answer 7

Potential growth

Question 8

What is long run growth?

Answer 8

Changes in the productive capacity of the economy

Question 9

What is a recession?

Answer 9

Two consecutive quarters of negative economic growth

Question 10

What are the 3 methods of measuring GDP?

Answer 10

Income method - total value of all the incomes made by the population
Output method - total value of production made
Expenditure method - total value of expenditure by population

Question 11

What is unemployment?

Answer 11

Consists of the those who are willing and able to work and actively seeking work but are not able to get a job

Question 12

What does the labour force consist of?

Answer 12

The unemployed and employed

Question 13

What is the unemployment rate?

Answer 13

The percentage of the labour force that is unemployed

Question 14

What is inactivity?

Answer 14

Of working age but not in the labour force

Question 15

What are some examples of reasons for inactivity?

Answer 15

Disability, don’t need to work, in full-time education, stay-at-home parent, carers, imprisoned

Question 16

What does the Consumer Price Index measure?

Answer 16

The changes in price paid by consumers for a weighted basket of goods and services (700) across all areas in the country based on the ‘typical household’

Question 17

What do the weights reflect in a weighted price index?

Answer 17

The average spending on each item, the bigger the spend bigger, the higher the weight

Question 18

What does the Retail Price Index measure?

Answer 18

The changes in price paid by consumers for a weighted basket of goods and services (700), as well as housing costs (mortgages, council tax, gas/electricity) across all areas in the country based on the ‘typical household’

Question 19

Why is the RPI normally higher than the CPI?

Answer 19

The RPI measures housing costs, which go up more than anything else in general

Question 20

What is the role of the balance of payments?

Answer 20

To record transactions between the UK and the rest of the world

Question 21

How are index numbers calculated?

Answer 21

(New price / base year price (100)) x 100

Question 22

How do you calculate the overall price index for a year?

Answer 22

Sum(price x weights)/sum weights

Question 23

How do you calculate changes in the price level (rate of inflation) using index numbers?

Answer 23

(New price index - previous price index) / (previous price index) x 100

Question 24

What are the limitations of using NI data to assess changes in living standards over time?

Answer 24

There are issues with measuring GDP: cash in hand, double counting
GDP per capita has no indication about inequality
Hidden economy is not accounted for: illegal activity, tax avoidance/evasion
Ignores quality of products and where output is coming from

Question 25

What are the differences between GDP and GNI?

Answer 25

GDP measures the total value of production within the UK over a year
GNI measures the final value of output/expenditure by UK owned FoP, whether they are located in the UK or overseas
GNI = GDP + NPIA

Question 26

What is purchasing power parity?

Answer 26

The theory that estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent, according to each currency’s purchasing power

Question 27

What is the importance of using PPP exchange rates when making international comparisons of living standards?

Answer 27

It helps to minimise misleading comparisons between countries, as GDP figures in USD tend to underestimate real levels of income/output in developing economies

Question 28

What is net property income from abroad (NPIA)?

Answer 28

Interest, profits and dividends coming into the UK from UK assets owned overseas minus interest, profits and dividends from foreign owned assets located within the UK heading overseas

Question 29

What are the benefits of using purchasing power parity to measure GDP?

Answer 29

Using PPP for GDP per capita better reflects standards/cost of living, for example products not exported/imported tend to be cheaper in developing countries, such as services like taxis, or sports tickets

Question 30

What are the negatives of using purchasing power parity to measure GDP?

Answer 30

It is very difficult to get an accurate measure for purchasing power