Measures of economic performance 2.1 Flashcards
Define economic growth.
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.
How can we measure economic growth?
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.
Define GDP.
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.
What is GDP an indicator of?
GDP is an indicator of the standard of living in a country.
What is the difference between total GDP and GDP per capita?
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.
When does GDP per capita grow?
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.
What does Real GDP account for?
Real GDP is the GDP adjusted for inflation.
What is nominal GDP?
GDP without adjustment for inflation.
Define GNI.
The value of good and services produced by a country over a period of time plus net overseas interest payments and dividends.
Define GNP.
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.
What is GNI affected by and why is it being increasingly used rather than GDP?
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.
What does changing national income levels show about a country?
Changing national income levels will show use whether the country has grown or shrank over a period of time.
What judgments can be made from changing national income levels?
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.
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?
GDP increase simply because of inflation, so real GDP figures need to be calculated.
Define exchange rate
The value of a currency in terms of another.
What can exchange rate be used to compare?
Also, why is this useful?
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.
Why may their be inaccuracies of using GDP to compare the standard of living?
-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.
What is the problem of using GDP to compare the standard of living?
(I)
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.
What is the problem of using GDP to compare the standard of living?
(Q of G/S)
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.
What is the problem of using GDP to compare the standard of living?
(S)
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.
Define inflation
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.
Define deflation
Deflation is the fall in prices and indicates a slowdown in the rate of growth of output in the economy.
Define disinflation
Deflation is a reduction in the rate of inflation
Why is the Consumer Price Index not totally representative?
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.
