Chapter 6 - Measuring Economic Performance

Question 1

Economic Growth?

Answer 1

A measure of an increase in real gross domestic product.

Question 2

GDP?

Answer 2

Gross domestic products monetary measure of all final goods and services produced in a period (quarterly or yearly).

Question 3

Real?

Answer 3

Adjusted for inflation. Sometimes referred to as ‘constant prices’.

Question 4

Nominal or current?

Answer 4

Inflation left in.

Question 5

Recession?

Answer 5

Two consecutive quarters of negative economic growth.

Question 6

Potential Economic Growth? (PPF curve as well)

Answer 6

A measure of the increase in capacity in an economy. It is a measure of how good an economy is in allocating its resources. Can be shown by an outwards movement of the PPF curve.

Question 7

Standard of Living?

Answer 7

A measure of the quality of life. Can include physical assets and consumption. Can also include less easily measured variables such as happiness, lack of stress, length of hours worked, levels of pollutions and capacity of houses.

Question 8

GDP per capita?

Answer 8

Total GDP divided by the population. Gives a better indicator of incomes as populations change per country.

Question 9

Quality of life?

Answer 9

A measure of living standards which takes into account more than just incomes or GDP.

Question 10

Inflation?

Answer 10

A sustained rise in the general price level.

Question 11

CPI?

Answer 11

Consumer Price Index. A measure of inflation used for inflation targeting in the UK. Doesn’t include housing costs such as mortgage interest repayments or rent.

Question 12

RPI?

Answer 12

Retail Price Index. A measure of inflation that includes housing costs. Also known as the ‘headline rate’.

Question 13

Link between Inflation and CPI?

Answer 13

Inflation is measured in the UK by changes in the CPI. The CPI is given as an index number. As Inflation is shown on a year to year basis, you need to calculate the chance over original x 100.

Question 14

Index number?

Answer 14

A number shown relative to another number in percentage terms. So the actual figures are removed and just the relative price difference is shown.

Question 15

Base year?

Answer 15

Used for comparison between price levels in different time periods. It is given by the number 100.

Question 16

What measure is used to represent the changes in the costs of living as household experiences in the CPI?

Answer 16

The Living Costs and Food Survey

Question 17

What is the Living Costs and Food Survey?

Answer 17

Information is collected from nearly 7000 households in the UK using self-reported diaries of all purchases. Weights are assigned to each item bought by the average household. The weights show the proportion of income spent on each item. A price survey is undertaken by civil servants who collect data once a month about changes in the price of the 650 most commonly used goods and services in a variety of retail outlets.

Question 18

Weight (in relation to CPI)?

Answer 18

Show the proportion of income spent on items and are used to ensure that the percentage change in price reflects the impact on the average family in terms of their spending.

Question 19

Price Index?

Answer 19

The prices changes are multiplied by the weights to give a price index.

Question 20

Why is inflation significant?

Answer 20

It is an important measure of the success of an economy. If inflation rates are two high or too low, it is a sign the economy is experiencing problems.

Question 21

Inflation Target?

Answer 21

2% + or - 1% of the CPI in the UK. This is set by the Monetary Policy Committee.

Question 22

What is the Primary tool in the UK for setting inflation?

Answer 22

Monetary Policy. The base rate of interest. The cost of credit that the central bank set for its immediate financial transactions, and other rates are based pro rata (promotional) against this.

Question 23

What is the Ceiling/ Floor.

Answer 23

3% ceiling. 1% floor. of target if outside these values.

Question 24

What is the MPC?

Answer 24

Monetary Policy Committee. A group of 9 Bank of England economists who meet monthly to set the base rate of interest. If the inflation target isn’t met, they have failed to reach their target.

Question 25

What is the relation to inflation (cost of living) and wages?

Answer 25

If nominal wages increase by less than inflation then the standard of living will fall, caters paribus.

Question 26

Why is the CPI often critiqued?

Answer 26

As it doesn’t account for housing costs. These can make up a significant amount of expenditure , meaning that CPI may not be accurate when measuring the inflation within and economy.

Question 27

Economically Active?

Answer 27

Those people who are at work or who are willing to work. Also called the workforce. The terms includes unemployed people.

Question 28

Employment?

Answer 28

A measure of people in work or as a percentage. e.g. the number of people in work divided by the number of people who are economically active x 100.

Question 29

Unemployment?

Answer 29

The number of people looking for work but unable to find it or number of People out of work divided by number of people economically active x100.

Question 30

What are the four types of unemployment?

Answer 30

Cyclical, Frictional, Structural and Classical.

Question 31

Cyclical Unemployment?

Answer 31

A.K.A Demand Deficit. Lack of spending in the economy/recession means people are out of work.

Question 32

Structural Unemployment?

Answer 32

When industries are in decline and workers’ skills are becoming obsolete.

Question 33

Frictional Unemployment?

Answer 33

When people are between jobs.

Question 34

Classical Unemployment?

Answer 34

When there are problems with the supply side of labour (e.g. minimum wage too high)

Question 35

What are the costs of unemployment?

Answer 35

Costs to the person without income.
Non income costs - Skills become obsolete.
Costs to firms - Less spending in shops.
Government costs - Jobseekers’ allowance.

Question 36

JSA?

Answer 36

Job Seekers Allowance is a payment made to people who are willing and able to work but are not currently employed.

Question 37

What are the measures of unemployment?

Answer 37

ILO Measure: (conducted by the labour force survey) Asks people aged between 16-65 whether they’ve been out of work for the last four weeks and are ready to start within two weeks.
The Claimant Count: Records the people who have successfully claimed the JSA.

Question 38

What are the benefits of increased employment?

Answer 38

Increased income - Increasing standards of living.
Improved Skills - (human capital of workers)
Multiplier Effect - Increased income leads to increased spending, increasing firms profits.
Higher government taxation revenue and falling JSA.

Question 39

Net Migration?

Answer 39

A term that looks at immigration and emigration and the balance between the two within a country.

Question 40

Why might migration occur?

Answer 40

Searching for better pain work or work.
Studying abroad.
Escaping from social or political problems.
Accompanying family members.
Disagreement with tax structures.
The impact of migration will be dependent on why people are moving.

Question 41

What is the Balance of Payments?

Answer 41

A record of international payments over the course of a year. It is made up of the Current Account and the Capital/ Financial Account. Knowledge of the Capital account isn’t needed for the exam.

Question 42

What is the Current account.

Answer 42

The current account of the balance of payments records payments for transactions other than investments or speculation.
It comprises of:
Trade in Good/Services.
Investment income (dividends, profit and interest. All rewards, not movement)
Transfers (e.g. tax payments to foreign investors)

Question 43

What are some examples of the causes of a current account deficit?

Answer 43

A strong exchange rate.
Higher rates of inflation compared to other countries.
High wage costs compared to other countries.
High level of growth in a country, resulting in people with higher incomes purchasing more imports.

Question 44

Current Account deficit on the balance of payments?

Answer 44

When more money is flowing out of a country than is flowing in. Imports are greater than exports for example.

Question 45

HDI?

Answer 45

Human Development Index. A composite measure of quality of life which is valuable for comparing different countries. Comprised of one third education (years in schooling), one third Health (life expectancy) along with one third GDP per capita (adjusted to the purchasing power parity).

Question 46

Purchasing Power Parity?

Answer 46

An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency’s purchasing power.

Question 47

Why the HDI isn’t perfect?

Answer 47

Doesn’t give any indication of how living standards may change in the future.
Doesn’t indicate deprivation ( what people are going without, such as water).
Not clear on poverty lines and how hard life may be for some people.
Percentage of adult males in agriculture may be useful. (made narrow and precise to make it safer to compare across different customs. Opportunities tend to be weaker when more people are in agriculture.
Levels of Clean water provide some insight into life expectancy.