LS2 Measures Of Economic Performance

Question 1

What is a macroeconomic aggregate?

Answer 1

Aggregates’ here means ‘totals’ — for example, total unemployment in an economy, or total spending on goods and services

Question 2

How do you calculate an index number?

Answer 2

(Raw number in period / raw number in base period ) x 100

Question 3

What is a nominal value?

Answer 3

Measurements made using prices that are current at the time a transaction takes place

Question 4

What is a ‘real’ value?

Answer 4

the quantities produced after having removed the effects of price changes.

Question 5

How do you convert a nominal measurement to a real one?

Answer 5

100 x (nominal GDP / real GDP)

Question 6

What is economic growth?

Answer 6

an increase in the productive capacity of the economy, or the quantity or quality of its goods/services

Question 7

Look at notes for ppf

Answer 7

:)

Question 8

Explain GDP

Answer 8

GDP:
- Gross domestic product (GDP) represents the total output of an economy during a period of time.

Question 9

Define inflation

Answer 9

Inflation is defined as an increase in the overall level of prices in an economy. Inflation can be calculated as the percentage rate of change of prices over time.

Question 10

How is inflation measured?

Answer 10

We use a price index to measure inflation:
- CPI (consumer price index) measures the effect of inflation on a basket of goods (excluding costs related to housing) comparing index numbers of time period and base year.

Question 11

Define deflation and disinflation therefore the difference is?

Answer 11

Deflation is negative inflation (inflation below zero)
Disinflation is a period in which inflation falls relative to the previous period (line is above zero)

Question 12

How do banks fight deflation? (And why is deflation bad?)

Answer 12

They decrease the interest rates
People post phone purchases as they expect prices to fall even further which would mean a fall in demand in the economy, this perpetuated the recession

Question 13

Define:
Employed
Unemployed
Economically inactive
Discouraged worker

Answer 13

Employed: those who are employed by firms other organisations or are self-employed
Unemployed: those within the workforce but without jobs
Economically inactive: those who aren’t working and are not looking for work E.g. students, retired people, sick people, carers
Discouraged worker: someone who has failed to find work and has given up looking

Question 14

Discuss Purchasing power parity

Answer 14

• PPP stands for purchasing power parity.
  • PPP measures how many units of one country’s currency are needed to buy the same basket of goods and services as can be bought with a given amount of another currency.
  • In countries where the relative cost of living is high such as Norway and Switzerland, there will be a downward adjustment to a nation’s PPP-adjusted GNI per capita.
  • In nations where the relative cost of living is low such as India, the real purchasing power of $1,000 will be higher and this leads to these countries seeing their PPP-adjusted per capita incomes rising in global league tables

Question 15

Compare GDP and GNI

Answer 15

Comparison:
- GDP focuses on domestic economy, GNI accounts for income flow between countries
- GNI is more straightforward and easily understood, it is a more well established indicator available in more countries
- GNI accounts for different sizes of populations (when calculating GNI per capita)

Question 16

What are the advantages and disadvantages of GDP as a measure of economy

Answer 16

Advantages of gdp:
1. Easy to make comparisons over time (i.e. looking at the % rate of economic growth).
2. Easy to compare different countries e.g. contrasting relatively high and low growth countries.
3. It correlates with other measures of living standards including the Human Development Index. (HDI)
4. Having a higher income generally correlates with being able to buy more goods and services (which can include services such as education and healthcare and better housing)

Disadvantages of GDP:
- GDP tends to understate real national income per capita due to presence and growth of the shadow economy and the value of unpaid work done by volunteers and by people caring for their family.
2. The shadow economy includes illegal activities such as drug production and distribution, prostitution, theft, fraud and concealed legal activities such as tax evasion on otherwise-legitimate business activities such as non-reported self-employment income.
3. The UK government estimated this hidden economy “tax gap” at £3.5 billion in 2016.

Question 17

What are the limitations of using published data (GDP and GNI) to measure the standards of living?

Answer 17

• doesn’t show the inequalities of income and wealth. Distribution not accurately represented
• Changes in leisure & working hours and overall working conditions – affecting people’s work-life balance.
  3. Gross Domestic Product makes no allowance for the depreciation of capital machinery.
  4. Valuation of changes in years of people’s healthy life expectancy at birth.
  5. Value of non-marketed output (prices for some goods and services might not exist) and the social value of unpaid work e.g. voluntary care and other work at home, time spent on charitable activities. In the UK, unpaid work was valued at £1 trillion in 2016, of which more than half was childcare, housework, and adult care. In the same year, measured GDP was £1.8 trillion.
  6. Innovation and improvements in the quality of products we consume including basic public services.
  7. Impact of GDP growth on the sustainable stock of our natural resources – e.g. the threats to natural capital.
  8. Defensive expenditures – e.g. money spent protecting against crime, or cleaning-up the effects of environmental pollution and waste adds to published GDP but has a negative effect on social welfare.
  9. Doesn’t take into account the scale of household debt / debt-servicing costs.
  10. How do you measure the value of digital services such as Google & Instagram consumed for free on the web

Question 18

What is economic welfare?

Answer 18

• A broader measure of well-being (i.e. social + economic factors are considered).
• Many aspects of well-being are not directly linked to material aspects of life.
• Welfare measure might include changing levels of inequality + median household incomes.

Question 19

Explain GNI

Answer 19

GNI:
- GNI (gross national income) represents the income of the residents of the country. GNI is GDP plus net property income from overseas (NPIO).
- Remittance transfers are included in GNI and are important for some lower and middle-income countries.
- GNI per capita is used when calculating the income component of the Human Development Index (HDI).
- Countries with strong net inflows of remittances and other incomes (ceteris paribus) will see their GNI rise.

Question 20

State and explain an economic theory associated with the relationship between income and happiness

Answer 20

The eastern paradox states that long-term growth rate of happiness and income are not significantly related. Theories suggest that happiness only increases with income if there is a fulfilment of basic necessities.. beyond this point, there is no significant relationship