Measures of economic performance

Question 1

define GDP

Answer 1

the total sum of all the goods and services produced by a country

Question 2

2 meanings of economic growth

Answer 2

1. actual economic growth

2. potential economic growth

Question 3

an increase in GDP is a sign that a country is experiencing what?

Answer 3

• increasing incomes
• increasing output
• increasing spending

Question 4

what does an increase in GDP not mean? give reasons why

Answer 4

does not mean a better standard of living

• may be working for longer
• more work pressures
• higher cost of living e.g. mortgage payments
• pollution is likely to increase
• other social costs can also increase

Question 5

what are ppp’s (purchasing power parities)

Answer 5

when values are expressed in accordance with the amount that the currency will buy in the local economy.

Question 6

what is ppp good for

Answer 6

International comparisons - if cost of living is high - PPP value of GDP will be lower

Question 7

what are the limitations of using GDP to compare living standards between countries and over time

Answer 7

• if output is self-consumed, bartered (traded without price system), or if tax is not declared after sales - national income will not reflect true standard of living.
• informal economy: e.g. charity shops are an output of service but have no income that shows up
• income distribution; sometimes a large part of income is earned by a very few people - this makes the mean income higher - so doesn’t reflect real standard of living for most people
• consumer and capital spending: spending on investment goods is good for the future but not for the present living standards.