Measures of economic performance 2.1 Flashcards

1
Q

Define economic growth.

A

Economic growth is the rate of change of output. It is an increase in the long term productive potential of the country which means there is an increase in the amount of goods and services that a country produces.

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2
Q

How can we measure economic growth?

A

We can measure economic growth by the percentage change in the real GDP per annuum. It can also be shown through the shift of the PPF.

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3
Q

Define GDP.

A

GDP is the standard measure of output, which allows use to compare countries. It is the total value of goods and services produced in a country within a year.

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4
Q

What is GDP an indicator of?

A

GDP is an indicator of the standard of living in a country.

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5
Q

What is the difference between total GDP and GDP per capita?

A

Total GDP represents the overall GDP for the country whilst GDP per capita is the total GDP divided by the number of people in a country.

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6
Q

When does GDP per capita grow?

A

GDP per capita grows if national output grows faster than the population over a given time period, so there are more goods and services per person to enjoy.

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7
Q

What does Real GDP account for?

A

Real GDP is the GDP adjusted for inflation.

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8
Q

What is nominal GDP?

A

GDP without adjustment for inflation.

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9
Q

Define GNI.

A

The value of good and services produced by a country over a period of time plus net overseas interest payments and dividends.

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10
Q

Define GNP.

A

The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically (GDP) and overseas. It is the value of all the goods produced by citizens of a country, whether they live in the country or not.

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11
Q

What is GNI affected by and why is it being increasingly used rather than GDP?

A

GNI is affected by profits from businesses owned overseas and remittances sent home by migrant workers. This is increasingly used rather that GDP because of the growing size of remittances and aid.

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12
Q

What does changing national income levels show about a country?

A

Changing national income levels will show use whether the country has grown or shrank over a period of time.

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13
Q

What judgments can be made from changing national income levels?

A

Changing national income levels can be used to make judgement about economic welfare as growth in national income means a rise in living standards as the economy is producing more goods and services so people have access to more things.

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14
Q

As country’s population grows over time, then this may cause a rise in GDP without a rise in living standards.

How is this possible?

A

GDP increase simply because of inflation, so real GDP figures need to be calculated.

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15
Q

Define exchange rate

A

The value of a currency in terms of another.

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16
Q

What can exchange rate be used to compare?

Also, why is this useful?

A

Exchange compare how much a typical basket of goods in the country costs compared to one in a another country.

Exchange rates are useful when comparing countries as it takes into account the cost of living (how much has to be spent to maintain living standards), and so help us better compare living standards.

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17
Q

Why may their be inaccuracies of using GDP to compare the standard of living?

A

-Some countries are inefficient at collecting or calculating data and therefore comparisons can become less effective.

-There is a black market in which people work without declaring their income to avoid tax or to continue claiming benefits, and so GDP is underestimated as these incomes aren’t taken into account.

-GDP does not take into account home-produced services, for example in many LICs people work as subsistence farmers where they grow and consume their own crops without trading, so the GDP is underestimated.

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18
Q

What is the problem of using GDP to compare the standard of living?

(I)

A

Problems may arise due to Inequalities.

An increase in GDP may be due to a growth in income of just one group of people and so therefore a growth in the national income may not increase living standards everywhere. Income distribution also changes overtime and varies between countries so this makes comparisons difficult.

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19
Q

What is the problem of using GDP to compare the standard of living?

(Q of G/S)

A

Problems may arise due to the quality of goods and services.

The quality of goods and services is much higher than those 50 years ago, but this is not necessarily reflected in the real price of these goods and services. Therefore, living standards may have increased more than GDP would suggest since the quality of the goods and services has improved greatly. Furthermore, improved technology may allow prices to fall, suggesting a fall in living standards, however this is not the case.

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20
Q

What is the problem of using GDP to compare the standard of living?

(S)

A

Problems may arise with spending.

Some types of expenditure, such as defence, does not increase the standard of living but will increase GDP. For example, the GDP of the UK was a lot higher in WWII than in the 1930s but is difficult to argue that the standard of living was higher in the WWII. This therefore makes comparisons difficult as spending varies overtime and between countries.

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21
Q

Define inflation

A

Inflation is the general increase in prices in the economy which erodes the purchasing power of money. Low inflation is generally considered to be better than high inflation.

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22
Q

Define deflation

A

Deflation is the fall in prices and indicates a slowdown in the rate of growth of output in the economy.

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23
Q

Define disinflation

A

Deflation is a reduction in the rate of inflation

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24
Q

Why is the Consumer Price Index not totally representative?

A

It is impossible for the figure to take into account every single good that is sold in a country and so therefore the CPI is not totally representative. Similarly, different households spend different amounts on each good and so therefore the CPI only measures an average rate of inflation, and is not totally inflation.

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25
Q

The Consumer Price Index is more recent that the Retail Price Index, what is the problem of this?

A

The figure is more recent than the RPI, it is difficult to make comparisons with historical data. It was only used since 1996 with estimates going back to 1988 which means that levels of inflation using CPI can only be accurately compared back to then.

26
Q

What is the difference between the RPI and the CPI?

A

-The RPI includes housing costs such as mortgage and interest payments and council tax, whereas the CPI does not.

-The CPI takes into the account the fact that when prices rise people will switch to a product that has gone up by less. Therefore, the CPI is generally lower than the RPI.

-The RPI excludes the top 4% of income earners and low income pensioners as they are not ‘average’ households whilst the CPI covers all households and all incomes.

27
Q

What is demand pull inflation?

A

When inflation is caused by an increase in aggregate demand.

28
Q

What is cost push inflation?

A

When business find their costs have risen, they will put up prices to maintain their profit margins. This can be caused by any factor which decreases AS.

29
Q

How can too much money in an economy supply cause inflation?

A

If people have access to money they will want to spend it, but if there is no increase in the amount of the goods and services supplied, then prices will have to rise.

30
Q

How can the government cause inflation?

A

The government can increase the amount of money they print and decisions to increase the money supply.

(link to idea of too much money in an economy).

31
Q

What are the effects of inflation on living standards of consumers?

A

-If people’s incomes do not rise with inflation then they will have less to spend, which could cause a fall in living standards.

32
Q

What are the effects of inflation for consumer who are in debt?

A

Those who are in debt will able to pay it off at a price which is of cheaper value, but those who are owed money receive less because the money they get back is off cheaper value.

33
Q

What are the psychological effects of inflation for consumers?

A

Inflation has psychological effects on consumers: because prices are rising, they may feel less well-off, even if their income is rising in line with inflation, and so this cause consumers to decrease their spending.

34
Q

What is the negative effect of a country having a higher inflation compared to other countries?

A

For example, is inflation in Britain is higher than other countries, British goods will become more expensive. This will lead to British goods becoming less competitive and make them more difficult to export. This will also affect the balance of payments.

35
Q

Why is deflation (prices falling) bad for an economy?

A

Deflation will encourage consumers to postpone their purchases as they wait for the price to fall further. Consumers are 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 for goods, leading to a fall in firms’ profit, and in business confidence which can lead to a long term reluctance to invest.

36
Q

In general, inflation/deflation/disinflation is difficult to predict?

What does this mean for firms?

A

This means that firms cannot plan for the future.

37
Q

What must firms do when inflation/deflation/disinflation occurs?

What is the problem of this?

A

Firms will have to calculate new prices then change their menus, labelling etc. and this can be expensive.

38
Q

What will happen in if the government fails to change excise taxes with inflation?

A

Real government revenue will fall.

39
Q

What happen is the government fails to change income tax allowance with inflation.

A

Then real government income will increase and taxpayers will have less money.

40
Q

What is the effect on workers if they do not receive yearly pay rises of the rate of inflation?

A

If workers do not receive yearly pay rises of the rate of inflation, they will be worse off and their living standards will decrease. Also, those in weaker unions tend to be the most affected as they are unable to win wage rises in line with inflation.

41
Q

What effect can deflation have on workers?

A

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.

42
Q

Define Claimant Count.

A

The Claimant Count is the number of people receiving benefits for being unemployed. It provides the number of claimants on a particular day each month and the numbers joining and leaving the count each month.

43
Q

According to the ILO, define employed.

A

Those who do more than 1 hour of paid work a week or are temporarily away from work. Also, people are employed if they are on a government supported training scheme or do a minimum 15 hours of unpaid work for their family business.

44
Q

According to the ILO, define unemployed.

A

Those of working age who are without work, able to work and have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks.

45
Q

According to the ILO, define inactive.

A

Those who are neither employed or unemployed; they are people of working age not seeking employment as well as those seeking employment but not able to start work (e.g. health related issues, those in study).

46
Q

What is the Labour Force Survey (LFS)?

A

The Labour Force Survey (LFS) is a sample of people living in households and is a legal requirement for every country in the EU. It asks questions about personal circumstances and activity in the labour market to class people as employed, unemployed or inactive in by the ILO definitions. The figures are only an estimate of the true level of employment as it is measured by a sample.

47
Q

Why does the LFS tend to be higher than the Claimant Count?

A

Some people aren’t eligible for benefits but are classed as unemployed so these people would appear in the LFS but not the Claimant Count. This can be if their partner is working or if they are looking to work along for work along full-time study.

48
Q

Why may some people not be included in the LFS unemployment measure but would be in the Claimant Count?

A

Some people may be working in a hidden economy or frequently claim benefits.

49
Q

Why is it argued that the Claimant Count and the LFS both underestimate the figure?

A

They do not include people who are:

-working part time but would like to work in the future.

-on government training schemes who would prefer employment.

-classed as sick or disabled.

-actively looking for jobs but would take a job if offered.

These are the hidden unemployed.

50
Q

What is meant by people who are economically active?

A

The economically active are the employed and unemployed. They are engaged in labour market and are people employers can look to recruit. The workless are employed and inactive.

51
Q

Define employment rate.

Define unemployment rate.

A

The employment rate is the percentage of the population of working age who are employed.

The unemployment rate is the percentage of the economically active who are unemployed.

52
Q

What is it mean if people are underemployed?

A

The underemployed are those in part-time or zero hour contracts when they would prefer to work full time and people who are self-employed but would rather be employees. It also includes those who are in jobs which do not reflect their skill level.

53
Q

Why does underemployment tend to increase during recessions?

A

Underemployment tends to increase during recessions because firms wil reduce staff hours instead of making them redundant and having to pay expensive redundancies packages. This means that the underemployed have lower incomes and so will spend less, reducing aggregate demand and growth of the economy.

54
Q

What will happen if inactivity increases?

A

Increases in inactivity will decrease the size of the labour force, therefore causing a fall in productive potential of the country. There will be a lower GDP and low tax revenues as less people are working.

55
Q

Why may a decrease inactivity have little effect on an economy?

A

Decreases in activity could just result in more people being unemployed if there are no jobs available to them.

56
Q

What is frictional unemployment and why does it occur?

A

Frictional employment is people moving between jobs. This could be due to new workers entering the labour market or people who have chose to leave their previous jobs.

It is not a serious problem for an economy as it is only short term.

57
Q

What is structural unemployment?

A

Structural employment is a long term decline in demand in an industry leading to a reduction in employment perhaps because of increasing international competition or technology. Demand for labour is lower than the supply in an individual labour market.

58
Q

Why is structural unemployment costly?

A

The lack of geographical and occupational mobility means than people will remain unemployed, so need to be retrained in order to gain a jobs. Retraining can be costly for firms.

59
Q

What is regional unemployment?

(A type of structural unemployment)

A

Regional unemployment is where certain areas of a country suffer from very low levels of unemployment due to industry closure. This problem is exacerbated by the fact that the loss of jobs can mean a fall in demand for other business in the area, forcing more closures and job losses.

60
Q

What is sectoral unemployment?

(A type of structural unemployment)

A

Sectoral unemployment is where one sector (primary, secondary and tertiary) suffers a dramatic fall in employment.

61
Q

What is technological unemployment?

(A type of structural unemployment)

A

Technological unemployment is where an improvement in technology means that jobs are replaced.