Measures of economic performance

Question 1

Define economic growth.

Answer 1

Economic growth is a measure of the increase in real gross domestic product (GDP).

Question 2

Explain the meaning of real.

Explain the meaning of nominal or current.

Answer 2

Real means that inflation has been taken into account, real values are sometimes referred to as ‘real prices’.
Nominal or current means that inflation has been left in the figures.

Question 3

Define GDP.

Answer 3

GDP is the total amount of goods and services produced in a country in one year, or the total amount spent or the total amount earned.

Question 4

Define potential economic growth.
How can it be shown?
What is it a measure of?

Answer 4

Potential economic growth is a measure of the increase in capacity of an economy.
It can be shown by a movement outwards of the PPF curve.
It is a measure of a country’s efficiency in using its resources.

Question 5

What is recession?

What are the likely effects of recession?

Answer 5

When a country experiences two consecutive quarters of negative economic growth it is aid to be in recession. Recession means there is less spending, output and income in the economy.
Recession is likely to lead to firms closing, increased unemployment and thus a fall in living standards.

Question 6

What is the most likely cause of an increase in living standards?
What is standard of living, and list the measures involved? (6)

Answer 6

An increase in GDP will likely lead to a rise in living standards.
Standard of living is a measure of people's quality of life, the measure an include:
1) Happiness
2) Lack of pollution
3) Length of hours worked
4) Capacity of houses
5) physical assets and consumption
6) Lack of stress

Question 7

On what is the rise in living standards as a result of rising income dependent on? (4)

Answer 7

Rising income doesn’t necessarily make living standards rise, this is dependent on:

1) Amount spent on investment and socially beneficial projects.
2) Population change
3) Whether inflation is accounted for
4) How extra money is distributed.

Question 8

What is GDP per capita?

Answer 8

GDP per capita is GDP divided by the population. It is a more accurate indicator of incomes.

Question 9

What is economic growth dependent on? (3)

Answer 9

1) Government spending - money spent on warfare or quality of life issues.
2) Relative exchange rates - purchasing power of local currency.
3) Data calculation method - reliability.
How much output is self-consumed - this won’t appear as GDP.

Question 10

Define quality of life.

Answer 10

Quality of life is a measure of living standards that takes more into account than GDP or income.

Question 11

What are purchasing power parities used for?

What is the PPP exchange rate?

Answer 11

Purchasing power parities are used to compare GDP in different countries and take into account the cost of a basket of commonly bought goods that could be purchased in each of the different countries being compared.
The PPP exchange rate is the rate at which the basket of goods costs the same in each country.

Question 12

Define Gross National Income.

Answer 12

Gross national income measures income received by a country both domestically (GDP) and net incomes from overseas.

Question 13

Define Gross national product.

Answer 13

Gross national product is the total market value of all goods and services produced by domestic residents plus the value of output from sales abroad that residents have received, minus the value of output claimed by non-residents.

Question 14

What is national happiness?

Why is this unreliable?

Answer 14

National happiness is a measure of national well-being, it provides an alternative measure of standard of living.
Some surveys measure objective happiness which about how people feel about themselves.
This is unreliable because people’s outlooks are variable and can be easily influenced.

Question 15

What is inflation?

Answer 15

Inflation is a sustained rise in the average price level, it is a weighted average of spending in all households.

Question 16

What is the CPI?

Answer 16

Changes in the consumer price index are used to measure inflation and are used for inflation targeting in the UK. The CPI does not include housing costs such as mortgage interest repayments and rent.

Question 17

What is the RPI?

Answer 17

The retail price index is a measure of inflation, also known as the headline rate, it includes housing costs and is used for price capping and for setting the state pension.

Question 18

Define deflation.

Define disinflation.

Answer 18

Deflation is a fall in the general price level, it is a sign of stagnation in the economy.
Disinflation is when prices rise more slowly than they have done in the past, if inflation rates are falling but are still above zero then the price level is still rising, but at a slower rate.

Question 19

What is an index number?

What can index numbers be used for?

Answer 19

An index number is a number given relative in percentage terms to the base year which is given the value 100.
This is used for the comparison of price levels in different time periods.

Question 20

What are weights?

Answer 20

Weights show the proportion of income spent on items and are used to ensure that the percentage change in price reflects the impact on the average family in terms of their spending.

Question 21

How is a price index given?

How can inflation be calculated from this?

Answer 21

The price changes are multiplied by the weights to give a price index; you can measure inflation from this by calculating the percentage change in this index over two years.

Question 22

Explain cost-push inflation.

Answer 22

Cost-push inflation occurs when aggregate supply decreases, i.e. total costs of production increase. This may be because oil prices have increased, the exchange rate has fallen making imports more expensive or because the minimum wage has risen in real terms.

Question 23

Explain demand-pull inflation.

Answer 23

Demand-pull inflation occurs when aggregate demand in the economy increases, this might be because interest rates have fallen, the level of confidence has risen, government expenditure has increased or because exports exports are rising relative to imports.

Question 24

What is the final cause of inflation?

Answer 24

Monetarists argue that inflation is caused by increses in the money supply.

Question 25

Why may inflation be damaging to an economy? (5)

Answer 25

1) It may damage international competitiveness, making exports expensive and imports cheap and worsening the balance of payments.
2) Real incomes fall if inflation is higher than rises in nominal wages.
3) If peoples’s wages do not rise in real terms, inflation will make them progressively worse off.
4) High inflation leads to the MPC deciding on tight monetary policy where interest rates are kept low, this can have damaging effects on investment and paying off debt.
5) Inflation is good if there are high levels of national debt, debt does not change in its nominal value when there is inflation, so in real terms it is cheaper to and finance and pay back.

Question 26

Define economically active.

Answer 26

Economically active refers to those people in work or who are willing to work, also called the workforce this includes the unemployed.

Question 27

Define economically inactive.

Answer 27

Those people who are unable to work such as students or unpaid carers, people not of working age and those who are unable to work for any other reason.

Question 28

What are the typical causes of unemployment? (5)

Answer 28

1) Cyclical (demand deficient) - where lack of spending/ recession in the economy means that people are out of work.
2) Structural - where industries are in decline and workers’ skills become obsolete.
3) Frictional - where people are between jobs.
4) Seasonal - Where people are out of work during certain seasons of the year, such as a ski instructor in summer.
5) Classical or real-wage unemployment - problems with the supply side of labour, this might be because the national minimum wage is set above the equilibrium wage.

Question 29

Give four costs of unemployment.

Answer 29

1) Costs to the government - governments have to spend more on JSA but receive less in ax revenue.
2) Costs to firms - people don’t spend as much in shops.
3) Workers skills become obsolete and people lose confidence.
4) Cost to the person without income.

Question 30

What is jobseekers allowance?

Answer 30

JSA is a payment made to those who are able and willing to work but who are currently not in employment.

Question 31

What is the claimant count?

What is the ILO measure?

Answer 31

The claimant count records those who successfully claim JSA.
The ILO measure (conducted by the Labour force survey) is a questionnaire asking people aged 16-65 if they have been out of work in the last four weeks and whether they would be able o start within two weeks.

Question 32

Explain the meaning of unemployed and underemployed.

Answer 32

The unemployed are those who are out of work but who are actively seeking it.
The underemployed are those who would take extra hours if they were available or those who are overqualified for the job they are in.

Question 33

What is the significance of increased employment? (4)

Answer 33

1) Increased incomes - rises in standards of living for households.
2) Improved skills - human capital is the education and skills that a workforce possesses.
3) Multiplier effects - increased incomes will lead to increased spending and in turn increased profits for firms.
4) Higher tax revenue for the government - more people pay tax and spend more, therefore people pay more VAT and firms have to pay more corporation tax.

Question 34

Explain the significance of decreased unemployment. (3)

Answer 34

1) Fall in government spending on benefits.
2) Increased flexibility in the job market.
3) Decreased dependency ratio, i.e. fall in the number of people that are inactive supported by the active and employed population, directly or indirectly.

Question 35

Define migration.
What is immigration?
What is emigration?

Answer 35

Migration is a general terms that looks at both immigration and emigration as well as the overall balance between the two.
Immigration is the where people move to a country for long term stay.
Emigration is where people leave a country for long term stay.

Question 36

What are the possible reasons for migration? (6)

Answer 36

1) People search for better paid work.
2) Study abroad
3) Escape from social or political problems in the original country.
4) Start a new life.
5) Disagree with tax structures.
6) Accompany family members.

Question 37

What is the balance of payments?

Answer 37

The balance of payments is a record of international payments over the course of a year.

Question 38

What is the current account? (4)

Answer 38

The current account records payment for transactions between countries in the present year (other than investment or speculation) and comprises:

1) Trade in goods
2) Trade in services
3) Investment income
4) Transfers - e.g. tax payments to foreign governments.

Question 39

What is a current account deficit?

What are the causes of a current account deficit?

Answer 39

A current account deficit is where more money flows out of a country than is flowing in.
Causes of a current account deficit:
1) Domestic currency too strong compared to other currencies.
2) High growth - more imports from abroad.
3) High wage costs relative to other countries.

Question 40

What is a current account deficit?

What are the causes of a current account deficit?

Answer 40

A current account deficit is where more money flows out of a country than is flowing in.
Causes of a current account deficit:
1) Domestic currency too strong compared to other currencies.
2) High growth - more imports from abroad.
3) High wage costs relative to other countries.
4) High rates of inflation compared to other countries.

Question 41

What is a current account surplus?

What are the causes of a current account surplus?

Answer 41

A current account surplus occurs when more money is flowing into a country than is flowing out.
Causes of a current account surplus:
1) Weak domestic currency.
2) Low growth - imports less attractive so greater incentive for firms to export.
3) Low wage costs
4) Low rates of inflation

Question 42

International trade means that countries become interdependent, what do they rely on each other for? (2)

Answer 42

1) For income - exports are par of a country’s aggregate demand.
2) For resources and goods and services - imports are necessary for production and consumption of goods in all countries.

Question 43

Explain why international interdependence can be both good and bad?

Answer 43

Some people argue that interdependence is beneficial because it makes countries cooperate with each other.
However, it can also cause trade blocs to become fairly powerful and can mean that some developing countries are unable to trade fairly.