KEI Flashcards
Define GDP and REAL GDP
Monetary value of all final goods and services produced within a country’s geographical boundaries over a given period of time
Real GDP - without inflation
Define real GDP growth rate
% change in GDP
What does positive % gdp growth mean
Economic growth
What does negative gdp growth signal
Recession
What types of economic growth are there?
5:
- actual
- potential (LRAS increases)
- sustained
- sustainable
- inclusive
What does sustained economic growth imply
Actual (increase in output along AS) + Potential growth (increase in LRAS)
What does sustainable economic growth imply?
Sustained growth + good for the environment
What does inclusive growth imply?
Income distribution (equality) - (GINI) + sustained economic growth
What does the Gini coefficient values imply?
Closer to 1 - income inequality
Closer to 0 - income equality
What is a key limitation of nominal gdp (clue: PxQ)
Nominal GDP may rise, but since it is Price (current) X Quantity (current), increase in nominal GDP could also be due to price increase - doesn’t accurately measure increase in output of a country
Define Gross national income:
Value of all final goods and services produced by nationally owned factors of production over a given period of time
GNI equation:
GDP + NFIA (income from abroad - income flowing out into a foreign country)
Limitations of GDP: (2) and how it affects calculations (consider context of country, LDC VS DC)
- Non marketed activities:
- not captured when using GDP
- despite using society’s resources, they don’t occur in markets and hence no transaction occurs and good isn’t priced.
Skewed against LDCs
- Underground markets:
- production value from unreported activities
Skewed against LDCs (lack of accurate data collection)
Macroeconomic goals of an economy
- Economic growth
- Price stability
- Maximum employment
- Favourable BOT position
Define CPI
Weighted price index of a fixed basket of goods and services purchased by a household
How to calculate inflation rate?
[(CPI current year) - (CPI previous year)] / CPI previous year x100%
Limitations of CPI: (2)
- Substitution bias
- Quality adjustment bias
Explain substitution bias
- when prices of a good rise, consumers switch to a relatively less expensive alternative of the good (if coffee gets more expensive than tea consumers switch to tea, but coffee is still given a higher weightage in CPI during immediate calculation)
- overstates increase in cost of living from one year to the next (consumers can switch to cheaper alternatives)
Explain Quality adjustment bias
Differences in quality of good that is not accounted for in CPI
What is the deflationary spiral?
Decrease in prices -> consumers withhold consumption -> consumption expenditure decreases -> firm revenue decreases -> income and employment decreases -> demand for a good decreases -> prices decrease …
What is the deflationary spiral?
Decrease in prices -> consumers withhold consumption -> consumption expenditure decreases -> firm revenue decreases -> income and employment decreases -> demand for a good decreases -> prices decrease …
What is meant by favourable balance of trade?
When there is a trade surplus (generally favoured over a trade deficit)
exports greater than imports
In what way can a trade surplus be unfavourable?
- Retaliatory measures from trade-deficit trading partner (i.e. stop importing goods)
- Vulnerable to external shocks (dependent on exports)
- SOL: export dependent: more intensive for local FOPs -> stress
What is meant by a trade deficit:
Total expenditure on imports more than total revenue from exports:
M > X
What is meant by trade surplus?
Total expenditure on imports less than total revenue from exports:
M < X
What is meant by trade surplus?
Total expenditure on imports less than total revenue from exports:
M < X
When can a trade deficit be favourable?
- developing country -> trade deficit through importing better goods increases SOL
- identifies which industry of the country needs more local focus
What does actual economic growth mean and how is it measured?
increase in national output actually produced over a given period of time
% increase in real GDP
what does potential growth mean and how does it occur?
increase in productive capacity of an economy measured over a given period of time.
increase in quantity or quality of resources contributes to this.
why is national product equals to national expenditure?
value of all goods and services produced in a given period equals amount that buyers spend to purchase and consume them
why is national income equals to national expenditure?
total income generated by economic activity returns to factors of production
- rent
- wages
- interests/dividends
- profit
uses of real GDP (4)
- measuring economic growth
- indicating living standards
- comparing between countries
- reflecting economic environment of the country
what does inflation IMMEDIATELY relate to
GPL
what does full employment mean?
non 0, low rate of unemployment where those who are able and willing to work have gained employment
can structural and frictional unemployment occur in an economy with full employment?
Yes
how to calculate unemployment rate?
no. of unemployed persons/labour force x100%
How to calculate Real GDP with nominal GDP and CPI?
Real GDP = nominal GDP/cpi current year x CPI base year
Limitations of unemployment rate (2)
- Doesn’t take into account those who leave jobs to upskill
- Doesn’t consider increase in size of labour force
Limitations of using real GDP per capita for SOL
- Income distribution (growth propagates income inequality within a country)
- GDP doesn’t account for composition of national output (Cd, I, G, X) - IGX may not be directly related to increased consumption levels in current period
Factors of non-material SOL (5)
- Healthcare
- Education
- Pollution
- Stress level
- Security
What is the Human Develpoment index (HDI)
What makes up the HDI
Measures the average attainment of a long and healthy life, knowledge, and material SOL
- Measurements of life expectancy at birth
- Mean number of schooling years for adults and children
- PPP adjusted real GNI* per capita
What is used to compare material SOL of a single country over time
Real GDP per capita
Does a high GDP growth rate always imply a high GDP per capita?
No. High GDP growth rate could just mean that an economy is utilising its spare capacity better and is developing faster (in contrast to a low GDP growth rate which could indicate an economy operating at almost full capacity
Limitations of PPP
- Exchange rate volatility
- Exchange rate more relevant to traded products than domestically exclusive products (differences in product)
Limitations of PPP Real GDP per Capita (4)
- Difficulty in determining common basket of goods (due to quality differences)
- Difference in consumption patterns
- Differences in accounting (what is and isn’t counted, data collection)
- Non-marketed activities (against LDCs)
Are welfare indicators the best indicators for measuring nmsol
• No
• One single indicator not enough
• Composite indicators with different weightages doesn’t accurately reflect the different priorities in welfare aspects to measure nmsol (which one does one prioritise more in nmsol)
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