Measures Of Economic Performance Flashcards
What does GDP stand for
Gross domestic product
What is gross domestic product (GDP)
GDP is the total market value of the goods and services produced in a country in a year. It is given as a value of production, in the local currency. On its own it is almost meaningless: we need to know how many people there are, what currency is worth in terms of its spending power in the local economy and what the changes have been to the previous measure.
What are the things we need to know about GDP as well as just the value for it to be useful
GDP on its own its almost meaningless, we need to know how many people there are, what the currency is worth in terms of its spending power in the local economy and what the changes have been since the previous measure.
Define production
Production is the value of goods and services produced in a given period of time
What are the two meanings of economic growth
Economic growth can mean actual economic growth and potential economic growth
What is actual economic growth
Actual economic growth is an increase in real incomes or real gross domestic product (GDP)
What is potential economic growth
Potential economic growth is an increase in the productive capacity in a country. This could be caused by an increase in the labour supply, an increase in investment or an increase in productivity.
Although it is a useful measure, potential economic growth is hard to record accurately.
What can potential economic growth be used to show
It can be used to show how an economy is performing relative to its output capacity. Differences between the two are known as the output gap.
What’s the output gap simply
The difference between how an economy is performing relative to its output capacity.
Define productivity
This is usually measured as the output per worker per hour worked
What is GDP the sum of
GDP is the sum of all goods and services produced in a country in a year
It is also the sum of all incomes earned in a country in a year
also it is the sum of all expenditure in a year.
GDP does not include earnings by its residents while outside the country. Consider it as a circular flow of income where for everything that is earned, something must be produced and something must be spent. The government measures all three flows - output, income and expenditure - which should in theory amount to the SAME figure !
However in practice, errors and omissions mean that there are some discrepancies between these three measures of GDP
Increases in GDP signals ….
Increases in GDP are a sign that a country is experiencing increasing incomes, output and spending. On the face of it, this is a good thing because people can have more goods and services, implying that they have a higher standard of living.
However there are many reasons why this may not be the case. If someone earns more, it may be that they work longer hours and have more work pressures, or that they have a higher cost of living such as increased mortgage payments. Pollution is likely to increase as they travel greater distances and there a whole range of external costs that may be incurred
What is actual economic growth
The rate of GDP increase in real terms is known as actual economic growth. It means more spending, higher incomes and higher output in the economy.
if economic growth is measured using GDP, What is GDP useful for when it’s a nominal value
MEANINGLESS
🤭😫😫😫😫
The value is meaningless unless the figures are given in real values, rather than nominal values.
What are real values
Real values have been adjusted to remove the effects of inflation
What are nominal values
Nominal values are the current incomes that are unadjusted for changes in average prices.
Define real values
Values that have been adjusted to remove the effects of inflation. The effects are removed using an index number that represents the changes in prices and the results are called ‘constant values’
Define nominal values
Values that are measured in money terms. Nominal figures are unadjusted ‘current values’
What do we also call real values
Constant values
What do we also call nominal values
Current values
For GDP to have any significance in terms of standards of living, figures must be calculated….
Per capita (per head)
Eg if a country’s income increases 10% but the population increases 20%, people would, on average, be worse off per head.
Tell me distinction between ‘total’ and ‘per capita’ measures
Total is the total GDP or a total value for something in a country/economy
Per capita is per head or per person
Tell me the distinction between ‘value’ and ‘volume’ measures
Another important distinction required when measuring economic growth is to look at values rather than volumes. Firms might achieve higher sales figures because they sell more in volume or number of products, but if those sales are worth less per unit then they are not seeing an increase in the value of their output.
As an example, consider Germany and China. Germany is the biggest exporter in the world by value, whereas China exports much more in terms of volume of goods.
If inflation is 2% and your nominal wages have risen by 2% have your real wages increased
No 📉 they stayed the same
GDP is best measured in real terms…
…. per capita
Is economic growth the only factor that affect standards of living
Standards of living include factors besides economic growth, although economic growth has a part to play in increasing living standards if the increased incomes are spread out across the economy.
What is GDP to do with goods and services and what does it not include
Gross domestic product (GDP) is the total market value of all goods and services produced in the country in a given year. GDP does not include earnings by its residents while outside of the country.
What does GNI stand for
Gross national income
What is GNI
Gross national income is an augmented version of GDP.
GNI is GDP plus net income paid into the country by other countries, for example interest and dividends.
The ‘net income’ is calculated by subtracting profits and Income that goes abroad from foreign owned companies from profits and income earned overseas from locally owned firms.
Tell me about examples of comparison of rates of growth between countries over time
An increase in GDP of 10% in one country does not mean that the country is doing better than a country with an increase of 5%. Similarly, changes over time have a different meaning: for example, increases in GDP in Japan in the 1960s were 10% a year compared to only 4% a year in the 1980’s, but the 1980s figure was based on a much larger economy.
What does an evaluation of growth figures depend on (to do with GDP)
How well off the country is in the first place, ie. it’s level of GDP
How much of the output is self-consumed, so does not appear as GDP
Methods of calculation and reliability of data
Relative exchange rates - do they represent the purchasing power of the local currency
Composition of government spending - is money spent on warfare or on areas that directly affect the quality of life such as education and health?
What do PPPs stand for
Purchasing power parities
What are purchasing power parties
(PPPs) are when values are expressed in accordance with the amount that the currency will buy in the local economy.
What’s ‘GDP at PPP’
Means that the exchange rate used is the one where the same basket of goods in the country, say the UK, could be bought in the USA at this rate of currency exchange.
This makes international comparisons much more helpful because where the cost of living is high it would be expected that the PPP value of GDP would be lower.
In 2018 real economic growth was 8.5% in Ethiopia, 7.1% in India and 1.4% In the uk, are these fully representative figures?
No, these figures may mask several differences not accounted for in GDP statistics
List the limitations of using GDP to compare living standards between countries and over time
Subsistence, barter and the hidden economy
The informal economy
Currency values
Income distribution
Size of the public sector
Consumer and capital spending
Quality issues
Quality of life issues
Tell me how subsistence, barter and the hidden economy is a limitation of using GDP to compare living standards between countries and over time.
If farmers consume their own output, if goods are traded without the price system (eg. by barter) or of goods are paid for without being declared for tax purposes, national income will not reflect the true standard of living. The estimates of the size of the hidden economy is 7% in the UK, 46% in India and 50% in Russia ! 🕵🏼♂️👀
Tell me how the informal economy is a limitation of using GDP to compare living standards between countries and over time
Some output is not recorded because it is not bought or sold, but it is still output.
For example, if a volunteer runs a charity shop this is output of a service, but here is no corresponding income. If someone grows their own potatoes this is output just as if they had bought them, but the home grown ones are not recorded.
Tell me how currency values is a limitation of using GDP to compare living standards between countries and over time
When trying to compare countries, there is difficult in knowing whether to use the official value of a currency (the exchange rate) or the purchasing power of that currency.
Tell me how income distribution is a limitation of using GDP to compare living standards between countries and over time
When comparing countries income per head, some sense of the income distribution should also be taken into account. In some cases, a large proportion of income is earned by a very few, which makes the mean income much higher than the income enjoyed by the ordinary person. In this way, the general standard of living in a country can appear higher than it really is for most people.
Tell me how the size of the public sector is a limitation of using GDP to compare living standards between countries and over time
If much of the spending in the economy is by government, it might or might not improve welfare for the population. The public sector is the part of the economy controlled by the government.
Tell me how consumer and capital spending is a limitation of using GDP to compare living standards between countries and over time
Spending on investment goods might mean standard of living increases in the future, but at the expense of living standards today. It is better to take account of future growth patterns rather than simply considering today’s income, and stark economic growth figures should be broken down to look at the investment element.
Tell me how quality issues is a limitation of using GDP to compare living standards between countries and over time
Spending on schools might be high, for example, but how can we measure quality? Are improving results enough to prove that living standards are rising?
Tell me how quality of life issues is a limitation of using GDP to compare living standards between countries and over time
Rising real incomes may be associated with factors which might reduce living standards, such as differences in the number of hours worked, different levels of air and noise pollution (eg resulting from differences in manufacturing processes) or different levels of stress.
If we just base comparisons of living standards on GDP will they be accurate
No, however, real income growth per head is a good guide to actual growth if these other factors are taken into account.
Instead of using GDP to compare living standards what can we use
We can take into account other measures of living standards apart from material goods and try to measure the quality of life.
How can we measure quality of life
Measure national happiness, rather than just focusing on monetary variables such as GDP
How can we measure national happiness
The Gross National Happiness (GNH) index has been designed in an attempt to define an indicator and concept that measures quality of life in more holistic and psychological terms than only using GDP.
However, the index has only officially been used in Bhutan. In the uk, the ONS measures national well being and reports progress against a set of headline indicators covering areas of our lives including our health, natural environment, personal finances and crime.
What is the Easterlin paradox
Within the area of happiness economics, some people refer to the Easterlin paradox, which is the idea that happiness rises with average incomes, but only up to a point. Beyond this, the marginal, gains in happiness fall, perhaps because people care about relative as well as absolute incomes. One conclusion we may draw from this is that government policy should not be aimed only at economic growth. There are other aims, such as reducing income inequality or external costs, which might have far greater impact on standards of living than having more money.
What is inflation
Inflation is a sustained rise in the general price level. The general price level is measured using an index such as the consumer prices index (CPI)
How do you measure general price level
Using an index such as the consumer prices index (CPI). The reason for using an index is that percentage changes can be shown easily, making effective comparisons possible.
Define inflation
A general and sustained increase in prices, measured by a change in a weighted index of prices such as the CPI
What’s deflation
Deflation is a fall in the general price level. It is a problem for people with debts, because the real payments (having adjusted for lower prices) will become larger. Deflation is a problem because it stops any firm wanting to invest in a country from abroad as the value of output is likely to fall relative to the initial costs and deflation is likely to cause aggregate demand to fall. Why buy an expensive consumer item when you know prices are going to come down?
Define deflation
A fall in the general level of prices, i.e negative inflation
What is disinflation
Occurs when prices rise more slowly than they have done in the past. For example, the rate of inflation might fall from 3% to 2%, meaning that prices are rising but less quickly than they were previously. Disinflation can be a sign that inflation is coming under control, but on the worrying side it can mean that investment and confidence are low in the economy.
Define disinflation
A fall in the rates of inflation, eg prices are rising at a slower rate
What is the first survey to do with expenditure in order to calculate inflation, CPI
The first survey on expenditure involves the collection of information about what people buy, currently known as the Office of National Statistics (ONS) Living Costs and Food Survey (LCF).
This is an annual survey that is used to determine the contents of a virtual ‘basket’ of goods and services that households spend their money on,and the proportion spent on each.
This survey is carried out by the ONS and involves collecting information from a sample of around 7,000 households in the UK using self-reported diaries of all purchases including food eaten out.
Households spend more on some items than others so, for example, a 10% increase in the price of electricity and gas would have a much bigger impact than a similar increase in the price of salt. For this reason weights are attached to the items in price indices. These weights reflect the relative importance of various items in the average shopping basket.
What is the second survey to do with prices about - to calculate the CPI
The second survey is of prices. The price survey is undertaken by civil servants who collect data once a month about changes in the price of the 650 most commonly used goods and services in a variety of retail outlets. Because similar items can be bought in high and low cost shops, a selection of prices is gathered for each item, with 120,000 prices gathered in all. The price changes are multiplied by the weights(from the first survey) to give a price index. You can measure inflation from this by calculating the percentage change in this index over consecutive years.
Why are ‘weights’ needed on items price indices for the CPI (the first survey finds these weights)
Households spend more on some items than others so, for example a 10% increase in the price of electricity and gas would have a much bigger impact than a similar increase in the price of salt. For this reason, weights are attached to the items in price indices. These weights reflect the relative importance of the various items in the average shopping basket.
Define weights
These are attached to the goods and services in the CPI to reflect the relative importance of the various items in the average shopping basket.
Why are there two surveys for the CPI
The first is known as the Office of National Statistics (ONS) Living Costs and Food Survey (LCF), it determined how much households (7000 self reported diaries used) spend on goods and workout weights for the price indices.
The second surveys monitor the change in price of goods of the 650 most commonly used goods at a range of outlets so 120,000 prices are gathered.
The price changes multiplied by the weights give the price index. You can measure inflation from this by calculating the percentage change in this index over consecutive years.
What does CPI stand for
Consumer price index
What’s the UK governments target for CPI inflation
2%
There is a tolerance of one percentage point either way so could be 1% or 3% and be deemed acceptable.
What does the governments target for CPI inflation mean
It is 2% +or - 1%
This means that small price rises are acceptable to the UK government. If prices rises by more than 3% they become a concern, but if they begin to rise by less than 1%, or even fall, then risks of deflation and even a recession might arise.
What’s different about the UKs target for CPI inflation to others
In many other countries and areas such as the eurozone there is a ceiling-only inflation objective. The current UK objective recognises that there are dangers attached to prices being too low (below 1%) as well as too high (above 3%)
What is an issue with the CPI to do with housing costs
The CPI measure does not include housing costs such as mortgage interest repayments or rent. Monthly mortgage payments often form a large part of a households spending and are certainly a cost of living for almost 10 million households in the UK, with average mortgage payments costing 15-20% of income. Therefore, if the CPI rises by only 2% and inflation seems to be under control, a rise in interest rates means that many households will never the less be experiencing the effect of higher mortgage payments, ie the cost of living rises. In this case, a wage rise linked to CPI excludes significant change in living costs.
Tell me an issue of the CPI to do with choosing households to measure
The CPI measures the cost of living only for an average household. The top and bottom 4% brackets are not included, and nor are pensioners.
Tell me an issue of the CPI to do with sampling
There are sampling problems; in 2017, less than 50% of households responded to the survey. In addition, households might not give accurate information about recent spending of various members within the household.
Tell me an issue of the CPI to do with the 650 items chosen to measure prices for
The list of 650 items is changed only once a year, but tastes and fashions change more quickly than this. In addition, the list does not reflect the fact that changes in retail outlets such as ‘buy one get one free’ temporarily change peoples spending habits.
Tell me an issue of the CPI to do with people with atypical spending patterns
For people with atypical spending patterns, such as vegetarians and non-drivers, the CPI is unrepresentative. For example, those who often buy rail tickets may experience a personal inflation well above 2% with recent rises in train fares.
Tell me an issue of the CPI to do with quality of goods
When the quality of goods changes, the measure breaks down because it is not comparing like with like. For example, if someone bought a more expensive mobile phone this year than last year, the price change might not be the result of inflation but because the phone is made to a higher specification.
Despite the limitations, the CPI is a measure that is used to make…
…international comparisons of the rate of inflation
What is the CPIH in essence
A new measure of inflation in the uk
What does CPIH stand for
Consumer price inflation including owner-occupiers housing costs.
Tell me about the CPIH measure for inflation
This measure of the rate of inflation has been the ONS preferred measure of consumer price inflation since March 2017. The main difference between the CPIH and the CPI is that CPIH includes changes in residential rents across the UK. It does not, therefore take into account the changes in the value of UK homes, but more specifically it estimates the amount it would cost all UK homeowners to rent their houses. Unlike CPI, CPIH also includes council tax on its calculations.
Why is the RPI measure of inflation needed
For many people, wage increases are linked to the rate of inflation and, if the CPI measure is used, wage increases will fail to take into account a large part of household expenditure in the form of housing costs. A more appropriate measure for wage increases is the retail price index. (RPI)
Tell me about the RPI as a measure of inflation
This is a more inclusive method than the CPI in that it includes housing costs, but it is not reliable for international comparisons and the statistical method of basing the data is also unique to the UK. Moreover, because the RPI includes the cost of mortgage interest repayments and these will rise when interest rates are raised, any interest rate rise implemented to tackle inflation will have a one off effect of making inflation appear worse, which makes the policy makers look incompetent.
Define retail price index (RPI)
An index used to measure inflation that includes housing costs such as mortgage interest repayments.
Tell me the 3 current uses of the CPI
Used for:
Public sector pension increases
Bank of England inflation target
Some increases in social security benefits
Tell me the 2 current uses of the RPI
Pension scheme increases where rules explicitly refer to the RPI
Regulated to rail fares
Tell me an exam tip to do with not confusing price levels with rates of inflation
Don’t confuse price levels (eg CPI) with rates of inflation. Increases in CPI are inflation, the rate of inflation may fall even when price levels are still rising. If inflation is above zero, but falling, the price level is rising as a slower rate.
What do we need to know about inflation to understand monetary policy
In order to understand how monetary policy works, it is important to consider the causes of inflation. In terms of aggregate demand/ aggregate supply (AD/AS) analysis, inflation can be shown as a shift to the right in AD or a shift to the left in AS.
What is demand-pull inflation
Demand pull inflation is associated with a rightward shift in the AD curve. It may be caused by an increase in any of the components of AD, for example, consumption, government expenditure or net exports.
What is cost-push inflation
A shift to the left in AS is known as cost push inflation and occurs whenever costs of production increase in an economy. These might be for short-term reasons, such as a fall in the exchange rate making imports more expensive, or for longer term reasons, such as higher corporation (profit) taxes.
Define demand pull inflation
An increase in the general level of prices caused by increased consumption, investment, government spending or net exports.
Define cost push inflation
An increase in the general level of prices caused by increased production costs such as a rise in wages or a fall In the exchange rate (imports more expensive)
What did Milton Friedman believe about about inflation
According to monetarists such as Milton Friedman, inflation is ‘always and everywhere a monetary phenomenon’. That is, monetarists believe that inflation is caused by increases in the money supply above the rate of the increase in the real output in the economy. Inflation can be controlled by controlling the money supply, either directly or through the rate of interest.
Define the money supply
The amount of spending power in an economy. It includes cash and bank deposits. Monetarists believe that an increase in the money supply has a direct relationship with inflation.
Who is affected by the costs of inflation
Problems for consumers, firms, the government and workers, but there are also some benefits!
For consumers, tell me all the effects of inflation
The real value of savings falls as prices rise
The purchasing power of those on fixed incomes falls as prices rise.
Those with high levels of personal debt benefit from inflation, as the real value of the debt falls.
