Measures of economic performance 2.1

Question 1

What is GDP

Answer 1

GROSS DOMESTIC PRODUCT it is the standard measure of output which allows us to compare countries. Total value of goods and services produced in a year

Question 2

Real gdp vs nominal

Answer 2

Real GDP is the GDP adjusted for inflation.
nominal is not adjusted.

Question 3

Total GDP vs per capita

Answer 3

Total represents the overall GDP for a country
Per capita is the total divided by the population of the country

Question 4

Gross national income

Answer 4

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

Question 5

Gross national product

Answer 5

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.

Question 6

Advantages of purchasing power parities

Answer 6

They provide an alternative to using exchange rates for comparisons of GDP.
It takes into account the cost of living so it helps us better compare living standards.

Question 7

What is a purchasing power parity

Answer 7

An exchange rate of one currency for another which compares how much a typical basket of goods in the country costs compared to one in another country.

Question 8

Disadvantages of using GDP to compare living standards for countries

Answer 8

-Inaccuracy of data
Some countries are inefficient at collecting data so comparisons become less effective.
There is a hidden market where people work without declaring their income so GDP is underestimated
-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.
-Quality of goods and services
The quality of goods and services is much higher
than those fifty years ago, but this is not necessarily reflected in the real price of these goods and services.
-Comparing different currencies
There are issues over which unit should be used to compare figures

Question 9

How is national wellbeing measured

Answer 9

They ask 4 key questions about life satisfaction, anxiety, happiness and worthwhileness, where people answer on a scale of 0 “not at all” to 10 “completely”. The report is now updated on a quarterly basis, rather than annually.

Question 10

Define
Inflation
Deflation
Disinflation

Answer 10

-Inflation is the general increase of prices in the economy which erodes the purchasing power of money. Low inflation is generally considered to be better than high inflation
-Deflation is the fall of prices and indicates a slowdown in the rate of growth of output in the economy.
-Disinflation is a reduction in the rate of inflation i.e. prices are still rising but they are not rising by as much.

Question 11

How is the Consumer prcice index used to measure inflation

Answer 11

The Office for National Statistics (ONS) collects prices on 710 goods and services from 20,000 shops in 141 locations and online sites and the prices are updated every month, with collectors visiting the same retailers to monitor identical goods. New items are added to the list every year, such as microwaveable rice and nail varnish , whilst others are taken away, including organic carrots.

● All these prices are combined using information on the average household spending pattern to produce an overall price index. The average household spending is worked out through the Living Costs and Food Survey, where around 5,500 families keep
diaries of what they spend over a fortnight.

● It takes into account how much is spent on each item so they are weighted i.e. we spend more on petrol than on postage stamps so an increase in petrol will have a bigger impact on the overall rate of inflation.

Question 12

Whats the problem with using CPI

Answer 12

● It is impossible for the figure to take into account every single good that is sold in the 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 representative.

● Moreover, it does not include the price of housing and so, since this has tended to rise more than the price of other goods, the data may be lower than it should be.

● Since the figure is more recent than 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.

Question 13

What is the Retail price index

Answer 13

The RPI is very similar to the CPI. However, there are some differences between the data included and the way it is calculated.

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

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

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

RPI is no longer considered as the best method and has had its national statistic status removed, although the Office for National Statistics still calculates it every month.

Question 14

What are the 3 causes of inflation

Answer 14

Cost push
Demand pull
Growth of money supply

Question 15

What is demand pull inflation

Answer 15

Prices in a market are determined by demand and supply and a shift in either will
cause price to change.

Inflation can therefore be caused by an increase in aggregate demand (AD), total demand for goods and services in the economy.

Question 16

What is cost push inflation

Answer 16

When businesses 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

Question 17

How does growth of money supply cause inflation

Answer 17

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

Question 18

Effects of inflation on consumers

Answer 18

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

● Those who are in debt will be able to pay it off at a price which is of cheaper value,
but those who are owed money lose because the money they get back is of cheaper value. Consumers who have saved will lose out as their money is worth less.

● 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
may cause them to decrease their spending.

Question 19

Effects of inflation on firms

Answer 19

● If inflation in Britain is higher than other countries, British goods will be more
expensive. They will become less competitive and make them more difficult to export. This will also affect the balance of payments.

● Deflation isn’t good as it encourages people to postpone their purchases as they
wait for the price to fall further.

● In general, inflation/deflation/disinflation is difficult to predict and so this means that
firms cannot plan for the future.

● Another effect of changing prices is that firms will have to calculate new prices then
change their menus, labelling etc. and this can be expensive.

Question 20

Effects of inflation on governments

Answer 20

● If the government fails to change excise taxes ) in line with inflation then real government revenue will fall.
However, if they fail to change personal income tax allowances then real government income will increase and taxpayers will have less money.

Question 20

Effects of inflation for workers

Answer 20

● 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

Question 21

What are the measure of unemployment

Answer 21

The claimant count
The labour force survey

Question 21

What is the claimant count

Answer 21

The Claimant Count is the number of people receiving benefits for being unemployed.

Question 22

What is the labour force survey

Answer 22

The Labour Force Survey is a sample of people living in households It asks questions about personal circumstances and activity in the labour market to class people as employed, unemployed or inactive. The figures are only an estimate of the true level of unemployment as it is measured by a sample.

Question 23

Claimant count vs Labour force survey

Answer 23

● Some people may not be included in the LFS unemployment measure but would be
in the Claimant Count. These may include people working in the hidden economy.
●Some people are not eligible for benefits but are classed as unemployed LFS tends to be higher
Both underestimate the figure

Question 24

What is underemployment

Answer 24

People who are in part time or 0 hour contracts and would much rather be in full time also people who are self employed but would much rather be employed

Question 25

What are the 4 types of unemployment

Answer 25

Frictional unemployment
Structural unemployment
Seasonal unemployment
Cyclical unemployment

Question 26

What is frictional unemployment

Answer 26

Frictional unemployment is due to people moving between jobs. This could be due to new workers entering the labour market or people who have chosen to leave their previous job. These people may take a while to locate and gain a job that they are willing to accept.
Short term

Question 27

What is structural unemployment

Answer 27

This is a much more serious form of unemployment as it is a long term decline in demand in an industry leading to reduction in employment perhaps because of increasing international competition or technology. It is where the demand for labour
is lower than the supply in an individual labour market e.g. ship building.

Question 28

What is seasonal unemployment

Answer 28

● Some employment is strongly seasonal in demand . Industries such tourism are only prominent during certain times of the year so only demand large numbers of workers at a specific time. Once that time of the year has passed then the labour force is drastically reduced.
● There is little that can be done to prevent this from occurring in a free market economy.

Question 29

What is cyclical unemployment

Answer 29

This is unemployment due to a general lack of demand of goods and services within the country. This is also known a Keynesian ‘demand deficient’ unemployment.

Question 30

What is real wage inflexibility

Answer 30

This is unemployment considered to be the result of real wages being above their market clearing level leading to an excess supply of labour. Some workers might be prepared to work for less than the minimum wage and companies may be prepared to take on more workers if they could pay them less than the minimum wage, but this
is illegal and so unemployed workers cannot get a job.

Question 31

What are the impacts of unemployment for workers

Answer 31

● Those who are made unemployed normally have a loss of income which usually results in a decline in their living standards.
● They often suffer from the stigma of being unemployed and feel degraded by the process of signing on to receive benefits to support their family. This can lead to stress, marital breakdown, suicide, physical illness etc.
● The long-term unemployed (those unemployed for more than 12 months) often find it more difficult to get another job as they lose skills.
● Those who are in jobs will suffer from lower job security and will fear being made redundant. They could also see a fall in wages because the firm can easily find someone to replace them if they complain about pay.

Question 32

Impacts of unemployment on firms

Answer 32

● There will tend to be a decrease in demand for their goods (but this depends on the YED) and so this could lead to a fall in profit.
● Long term unemployment can lead to loss of skills and reduce employability of workers, so firms have a smaller pool of skilled people to employ.
● They can offer low wages as people will take the job anyway because they know there is a lack of jobs so have few options.

Question 33

Impacts of unemployment on consumers

Answer 33

● Consumers in areas of high unemployment lose out because local shopping centres tend to be run down and don’t offer the range of shops available to those in areas of low unemployment. They suffer from less choice. The quality of goods may also decrease.
● The unemployed consumers lose out as they have less available to spend.
● However, firms may lower prices and put on sales in order to increase demand for their product.

Question 34

Impacts of unemployment on government

Answer 34

● The reduced income results in a fall in tax revenues and higher spending on welfare payments for families with people out of work, incurring an opportunity cost as the money could be better spent elsewhere.
● This will result in an increase in the budget deficit. It will be likely that the government will have to raise taxation or scale back plans for public spending on public and merit goods, such as the NHS or education. They may need to increase borrowing.

Question 35

Impacts of unemployment on society as a whole

Answer 35

● Rising unemployment is linked to social deprivation. There is a relationship with crime and social dislocation (increased divorce rates, worsening health and lower life expectancy).

● Areas of high unemployment often see a fall in demand for local goods and services, leading to a fall in income for those working in the services and sometimes further loss of jobs.

● It results in a loss of potential national output and represents an inefficient use of scarce resources. If people chose to leave the labour market permanently, then this will have a negative effect on LRAS and therefore damage the economy’s growth potential so the country is unable to achieve their desired PPF.

● Taxpayers paying money to the unemployed is not a loss for the economy as it is a transfer payment but the economy is affected because there is a fall in national output and the social costs of the unemployed e.g. violence and crime.

Question 36

What is the balance of Payments

Answer 36

The balance of payments is a record of all financial dealings over a period of time between economic agents of one country and all other countries . Imports are when goods/services come in, so money goes out. Exports are when money comes in, so the good/service goes out.

Question 37

What are the components of the balance of payments

Answer 37

Current account
Capital account
financial account

Question 38

What is the current account

Answer 38

● Trade in goods: These are known as visibles because you can physically see them. They are goods that are traded, whether raw materials or finished goods. The difference between visible exports and visible imports is known as the balance of trade.
● Trade in services: These are services traded in or out of the country, known as invisibles. A holiday to Spain by a British family is an invisible import as money leaves the UK and goes to Spain, whilst a Japanese firm buying insurance from a city of London firm is an invisible export as money enters the UK.

Question 39

What is a current account balance

Answer 39

The current balance= Balance of trade + Balance of invisibles + Net income and current transfers.

Question 40

What is a current account surplus and deficit

Answer 40

A current account surplus is where exports are greater than imports, so the current balance is positive. A current account deficit is where imports are greater than exports, so the current balance is negative.