Measures of Economic Performance

Question 1

What is GDP

Answer 1

GDP measures the quantity of goods and services produced in an economy

Question 2

What are the different types of GDP

Answer 2

• Real GDP: the value of GDP adjusted for inflation
• Nominal GDP: the value of GDP without being adjusted for inflation
• Total GDP: the combined monetary value of all goods and services produced within a country’s borders during a specific time period
• GDP per capita: the value of total GDP divided by the population of the country

Question 3

What are some other measures of national income

Answer 3

• Gross National Product: the market value of all products produced in
  an annum by the labour and property supplied by the citizens of one country
• Gross National Income: the sum of value added by all producers who
  reside in a nation, plus net overseas interest payments and dividends

Question 4

What is purchasing power

Answer 4

This is a 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 5

What are the types of inflation

Answer 5

• Inflation: the sustained rise in the general price level over time
• Deflation: where the average price level in the economy falls
• Disinflation: the slowing down of the rate of inflation.

Question 6

How do you calculate inflation

Answer 6

• The consumer price index: A basket of goods is made then the goods
  are weighted according to how much income is spent on each item
• Retail price index: The same as CPI but takes into account debts and mortgages

Question 7

What are some limitations of CPI

Answer 7

• CPI is slow to respond to new goods and services
• Different demographics have different spending pattern

Question 8

What are causes of inflation

Answer 8

• Demand pull: When demand in the economy increases which makes firms rise prices to profit maximize
• Cost push: When firms face rising costs of production which makes them increase prices to make up for the lost revenue in the new costs
• Growth of money supply: If the Bank of England printed more money it would hold less value and lead to inflation/hyperinflation

Question 9

What are some effects of inflation on consumers

Answer 9

• Those on low and fixed incomes are hit hardest due to cost of necessities increases.
• If consumers have loans the value of the payment will be lower as the value of the payment doesn’t increase due to the rate of inflation

Question 9

What are some effects of inflation on firms

Answer 9

• With higher inflation interest rates are likely to be high also so cost of borrowing and investing will be higher
• Workers might demand higher wages which could increase cost of production for firms
• Firms may be less competitive on a global scale if inflation is high
• Unpredictable inflation will reduce business confidence since they are not aware on their costs so investment might decrease

Question 10

What is the effect of inflation on the government

Answer 10

• The government will have to increase the value of the state pension and welfare payments because the cost of living is increasing

Question 11

What are some effects of inflation on workers

Answer 11

• Real incomes fall with inflation, so workers have less disposable incomes
• If firms face higher costs, there could be more redundancies when firms try and cut costs

Question 12

What are the two measures of unemployment

Answer 12

• The claimant count: This counts the number of people claiming unemployment related benefits
• The international Labour Organisation: Asks people certain questions: A survey is conducted and if people meet the criteria they are classed as unemployed

Question 13

What is the difference between unemployment and underemployment

Answer 13

The unemployed are those able and willing to work but not employed, The underemployed are those who have a job but their labour is not used to its full productive potential

Question 14

What is the effect unemployment has on consumers

Answer 14

If consumers are unemployed, they have less disposable income and
their standard of living may fall as a result

Question 15

What are the effects unemployment has on firms

Answer 15

• With a higher rate of unemployment, firms have a larger supply of labour to employ from
• Since less people are employed overall spending will decrease and so firms might lose profit

Question 16

What is the effect unemployment has on the government

Answer 16

If the unemployment rate increases, the government may have to spend more on benefits, which incurs an opportunity cost because the money could have been invested elsewhere

Question 17

What is the effect unemployment has on society

Answer 17

There could be negative externalities in the form of crime and vandalism, if the unemployment rate increases

Question 18

The types of unemployment

Answer 18

• Structural unemployment: This occurs with a long term decline in demand for the goods and services in an industry, which costs jobs, If workers do not have the transferable skills to move to
  another industry, or if it is not easy to move somewhere jobs are available
• Frictional unemployment: This is the time between leaving a job and looking for another job
• Seasonal unemployment: When workers are let go as their product is not in season (ice cream in winter)
• Demand deficiency/cyclical unemployment: Lack of demand so firms cut costs by letting workers go

Question 19

What is the balance of payments

Answer 19

This is a record of all financial transactions made between consumers, firms and the government from one country with other countries

Question 20

What is meant by current account surplus and deficit

Answer 20

A current account surplus means there is a net inflow of money into the circular flow of income, and a current account deficit is when the UK spends more on imports from foreign countries, than they earn from exports

Question 20

When are balance of payments deficit likely to happen in an economy

Answer 20

When there is high economic growth as the economy will have more disposable income and will consume more