Measures of Economic Performance

Question 1

Rate of real GDP as a measure of economic growth

Answer 1

The real economic growth rate, or real GDP growth rate, measures economic growth, as expressed by gross domestic product (GDP), from one period to another, adjusted for inflation or deflation

Question 2

Nominal and Real GDP

Answer 2

Nominal: Measurement of GDP at the current price level
Real: GDP after changes in inflation have been taken into account

Question 3

Total and Per capita

Answer 3

Total GDP: Total value of goods and services produced in an economy in a given time period
GDP per capita: National GDP divided by the number of people in the country

Question 4

Value (GDP) and Volume

Answer 4

Value: What certain goods/services are worth
Volume: Shows the number of goods/services that are produced

Question 5

GNI (Gross National Income)

Answer 5

Total value of goods and services produced in an economy in a given time period, as well as exports e.g. GDP including income from abroad (GDP+X)

Question 6

Comparison of rates of growth between countries of time

Answer 6

• Application in questions
• GDP per capita is more accurate and useful information that total
• Real is more accurate than nominal

Question 7

GDP at PPP

Answer 7

Takes into account variations in living costs

Question 8

Purchasing Power Parities

Answer 8

A way of comparing the real cost of living in two countries
- measures how much currency will be needed to buy the same quantity of goods and services in different countries

Question 9

Use of PPP-adjusted figures in international comparison

Answer 9

The PPP measure uses a constant exchange rate between countries rather than the actual exchange rate so we can draw better comparisons between countries with regards to living standards

Question 10

Limitations of GDP

Answer 10

1) The population size of a country is not taken into account for GDP or GNI - hence use of ‘per capita’
2) A nominal measure of GDP or GNI does not take into account inflation over time - hence use of ‘real’
3) Income from abroad is not accounted for in GDP - hence use of ‘GNI’
4) Differences in exchange rates aren’t accounted for - hence use of PPP
5) Informal sector and distribution of wealth are not taken into account

Question 11

GDP and GNI per capita

Answer 11

Both ‘real’ measures

Question 12

UK National wellbeing

Answer 12

National well-being is focused on measuring how people in the UK are doing as individuals, as communities, and as a nation.

Question 13

Gross National Happiness

Answer 13

• Psychological well-being
• Health
• Education
• Diversity, cultural and ecological resistance
• Good government
• Living standards

Question 14

Human Development Index - HDI

Answer 14

• Health e.g. life expectancy at birth
• Education (mean and expected years of schooling)
• Living standards (gross national income per capita)

Question 15

HDI Limitations

Answer 15

1) Doesn’t take account of qualitative factor e.g. cultural identity, freedoms and equality of opportunities
2) Doesn’t take environmental issues into account
3) No account taken with regards to income distribution

Question 16

Real income and Subjective happiness relationship*

Answer 16

The higher the households disposable income the happier they are, however only to a certain point (Easterlin Paradox). There are diminishing marginal returns, where once income raises to a certain stage it weighs too much on the mind of households.

Question 17

Inflation

Answer 17

A rise in the average price level of goods/services

Question 18

Deflation

Answer 18

A fall in the average price level of goods/services (negative inflation)
- bad for economy as it stops firms investing because the value of a good will fall at a later date

Question 19

Disinflation

Answer 19

Shows the average price level in increasing at a slower rate than it was previously
- good indicator the economy is slowing down
- e.g. inflation going from 4% to 2%

Question 20

Inflation measures

Answer 20

Consumer Price Index (CPI) and Retail Price Index (RPI)

Question 21

Hyperinflation*

Answer 21

Situation where average price rises are very high

Question 22

Consumer Price Index (CPI)

Answer 22

Internationally recognised measure of prices. Changes in CPI are used to measures inflation
- Average price of most common 650 household items in an economy

Question 23

Calculating Consumer Price Index (CPI)

Answer 23

2 values are needed
1) Sample of 7000 households (UK) where they record items they buy. Then a “weight” is assigned to each item depending on income% spent on the good (e.g. 5% of income in spent on clothes, clothes have a 5% weight)
2) Survey on the prices of the 650 most bought goods across diff shops and regions as prices can vary

Question 24

Limitations of Consumer Price Index (CPI)

Answer 24

• doesn’t take into account rent or mortgage repayments, so true impact of inflation on households may be higher
• more recent figure than RPI, so difficult to make comparisons with
  historical data
• not totally representative: doesn’t take into account every good that is sold in the country AND CPI only
  measures an average rate of inflation as households spend different amounts on each good
• the 650 goods/services included in the basket will not be accurate

Question 25

Retail Prices Index (RPI)

Answer 25

Alternative measure on inflation, also using a basket of 650 goods and a weighted index, which includes mortgage and rent payments, unlike the CPI.
- However it uses a different basket and doesn’t include some groups such as top and bottom 4% of income groups and pensioners

Question 26

Causes of inflation

Answer 26

Demand pull - SRAS
Cost push - SRAS
Growth of the money supply

Question 27

Demand pull inflation

Answer 27

Inflation caused by excess demand in the economy (AD shift right)
- when there is too much demand in the economy the price level will rise and so inflation occurs
- demand caused by increase in one or more elements of AD
(C+I+G+(X-M))

Question 28

Cost push inflation

Answer 28

Inflation caused by an increase in costs (of production) and raw materials (AS shift left) e.g. rising oil prices
- determined by supply-side factors e.g. higher wages and higher oil prices
- firms increase prices to maintain profit margins

Question 29

Growth of money supply

Answer 29

Inflation caused by there being too much money in the economy
- if people have access to money they will want to spend it, but if there is no increase in the amount of goods/services supplied, prices will have to rise

Question 30

Effect of inflation on consumers

Answer 30

• if people’s incomes don’t rise with inflation they will have less disposable income, causing fall in living standards.
• those in debt will pay it off at a price which is of cheaper value, but those owed money lose as the money they get back is of cheaper value
• consumers who have saved will lose out as their money is worth less.
• psychological effects: rising prices may make them feel less well-off, even if their income is rising in line with inflation, so this may cause them to decrease their spending

Question 31

Effect of inflation on firms

Answer 31

• if inflation in Britain is higher than other countries, British goods will be more expensive, so become less competitive making them more difficult to export, affecting the balance of payments
• deflation isn’t good as it encourages people to postpone purchases as they wait for the price to fall further: people will be more likely to save as the value of their money will rise in the future and they will be prevented from borrowing as deflation
  means the real value of their debt increases, this can lead to a fall in demand, leading to fall in firms’ profit, and in business confidence which can lead to a long term reluctance to invest
• inflation, deflation, disinflation are difficult to predict and so firms can’t plan for the future
• Menu costs: firms will have to calculate new prices then
  change their menus, labelling etc. and this can be expensive

Question 32

Effect of inflation on government

Answer 32

• if the government fails to change excise taxes (taxes at a set amount e.g. £1) in line with inflation, real gov revenue will fall, however if they fail to change personal income tax allowances (amount a worker can earn tax free) then real gov income will increase and taxpayers will have less money

Question 33

Effect on inflation on workers

Answer 33

• if workers do not receive yearly pay rises of the rate of inflation they will be worse off and their living standard will decrease; those in weaker unions tend to be most affected as they are unable to win wage rises in line with inflation
• deflation could cause some staff to lose their jobs as there is a lack of demand meaning firms see a fall in profit and have to decrease staff to cut costs