Measures Of Economic Performance- Theme 2

Question 1

Define GDP

Answer 1

GDP is the total value of goods and services produced in an economy

Question 2

Define actual economic growth

Answer 2

An increase in real incomes or GDP.

Question 3

Define potential economic growth

Answer 3

An increase in the productive capacity in a country.

Question 4

Define real values.

Answer 4

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, the results are called constant values.

Question 5

Define nominal values.

Answer 5

Values that are measured in money terms. Unadjusted, current values.

Question 6

Distinction between value and volume.

Answer 6

Firms might achieve higher sales figures because they sell more in volume or number of products, but if those sales worth less per unit then they’re not seeing an increase in the value of their output.

Question 7

Define gross national income (GNI)

Answer 7

GNI is the total amount of money earned by a nation’s people and businesses. calculated by adding income from foreign sources to GDP

Question 8

Evaluation of the comparison of rates of growth between countries and over time.

Answer 8

• how well-off country is in first place.
• how much of output is self-consumed, so doesn’t appear as GDP.
• methods of calculation and reliability of data.

Question 9

define term Purchasing Power Parities (PPP)?

Answer 9

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

Question 10

What are the limitations of using GDP to compare living standards between countries over time?

Answer 10

• the informal economy, some output is not recorded because it’s not bought or sold, but still output.
• currency values, difficulty knowing whether to use the official value of currency or the purchasing power of that currency.
• size of public sector, if much of spending in economy is by government, it might or might not improve welfare for population.

Question 11

Define inflation.

Answer 11

A general and sustained increase in prices, measured by a change in a weighted index of prices.

Question 12

Define deflation.

Answer 12

A fall in the general level of prices.

Question 13

Define disinflation.

Answer 13

A fall in the rate of inflation. E.g. prices are rising more slowly.

Question 14

How is the rate of inflation calculated using the CPI.

Answer 14

Through 2 surveys.

• 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). Carried out by the ONS. Annual survey used to determine contents of virtual ‘basket’ of goods and services that households spend their money on, and proportion spent on each.
• the second survey is of prices. 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. The price changes are multiplied by the weights to give price index. You can measure inflation from this by calculating the % change in this index over consecutive years.

Question 15

What are the limitations of CPI in measuring the rate of inflation.

Answer 15

• measures cost of living only for an average household. The top and bottom 4% income brackets are not included, and nor are pensioners.
• there are sampling problems. Only 57% of households respond to the survey and when do respond may not give accurate information
• list of 650 items only changed once a year, but tastes and fashions change more quickly than this.

Question 16

Describe the Retail Price Index as an alternative measure.

Answer 16

• more inclusive than the CPI in that it includes housing costs.
• not as reliable for international comparisons and the statistical method of basing data also unique to UK.

Question 17

Define retail price index (RPI).

Answer 17

An index used to measure inflation that includes housing costs such as mortgage interest repayments.

Question 18

Define Demand-pull inflation.

Answer 18

An increase in the general level of prices caused by increased consumption, investment, government spending or net exports.
- occurs whenever AD shifts to the right.

Question 19

Define Cost-push inflation.

Answer 19

An increase in the general level of prices caused by increased production

Question 20

Define money supply.

Answer 20

The amount of spending power in an economy it includes cash and bank deposits. Monetarists believe that an increase in money supply has a direct relationship with inflation.

Question 21

What are the effects of inflation on consumers?

Answer 21

• 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.

Question 22

What are the effects of inflation on firms?

Answer 22

• loss of international competitiveness, exports expensive and imports cheap. BofP worsens.
• increased uncertainty, if firms think costs rising and fear increases in interest rates, they might curb investment.
• increased prices might be sign that firms can make more profits, therefore could mean investment is increased.

Question 23

What are the effects of inflation for the government?

Answer 23

• redistribution of income. Those on fixed incomes will find incomes fall in real terms. Those with index-linked income won’t lose out unless they’re linked to a fairly unrepresentative measure.
• inflation reduces real interest rate, so cost of borrowing falls.
• a little inflation provides a cushion against perils of deflation. When prices falling economy can run into viscous cycle of underinvestment and reduced spending.

Question 24

What are the effects of inflation on workers?

Answer 24

• inflation might mean that some workers expect high wages but firms don’t feel confident about paying higher costs.
• according to some economists, there’s a trade-off between wage inflation and unemployment. This mean that if there’s high wage inflation it’s easier for people to find work because firms are raising only because they cannot chose other workers at lower wages.

Question 25

What is the claimant account?

Answer 25

A measure of unemployment that records the number of people claiming the JSA(Job seekers allowance).

Question 26

What is the international labour organisation (ILO)?

Answer 26

• Uses the labour force survey, a measure of unemployment of those out of work in the last 4 weeks and ready to start in the next 2 weeks, now the official measure used in the UK.
• involves face to face interview followed by a quarterly telephone survey of 80,000 households
• more inclusive than claimant account, but survey data out of date by 6 weeks by time they’re published.

Question 27

Define underemployment.

Answer 27

When a worker is working fewer hours than they would like to work.

Question 28

Define unemployment.

Answer 28

Situation in which someone is willing and available to work, but isn’t currently employed.

Question 29

What is employment affected by?

Answer 29

• the school or compulsory leaving age.
• number of school leavers entering higher or further education.
• level of net migration.

Question 30

Define inactivity.

Answer 30

A measure of people of working age who are either unwilling or unable to work.
-inactivity can make levels of unemployment look lower than they really are.

Question 31

What is real wage unemployment/inflexibility?

Answer 31

A measure of people who are unwilling to work at the going wage rate. Classical economists believe that wages that are kept artificially above the market-clearing wage are the main cause of unemployment.

Question 32

What is demand-deficient unemployment/cyclical unemployment?

Answer 32

When the economy can be in equilibrium but not everyone has a job. Caused by lack of aggregate demand in an economy such as during a recession, also caused by lack of business confidence

Question 33

What is structural unemployment?

Answer 33

A measure of workers who lose jobs in a declining industry and don’t have the skills to join other industries.

Question 34

What is frictional unemployment?

Answer 34

A measure of people who are between jobs.

Question 35

What is seasonal unemployment?

Answer 35

A measure of people who have jobs only at certain times of the year.

Question 36

What is the significance of migration for employment and unemployment?

Answer 36

• net migration= immigration-emigration
• migration may occur because people are looking for work or better paid work, or because they don’t agree with way in which they’re being taxed.
• if immigrants come into a country to fill vacancies,immigration leads to an increase in employment.
• if immigrants looking for work either don’t find it or displace people from work, employment be unchanged and unemployment may increase.

Question 37

What is the significance of skill for employment and unemployment?

Answer 37

• higher level of skills in labour force, more flexible worker will be if there’s change in requirements in labour market.
• employed people that are highly skilled are likely to be more able to move between jobs and stay in market if there are shocks to market.

Question 38

What are the effects of unemployment to consumers?

Answer 38

People will have lower incomes and living standards will fall.

Question 39

What are the effects of unemployment to firms?

Answer 39

Firms will find people spend less, so they’ll have to lower prices and make less profit. May mean people are more willing to stay in their jobs owing to fear of unemployment, so may be willing to work harder.

Question 40

What are the effects of unemployment to workers?

Answer 40

Workers without work might find their skills become obsolete or at least out of date.

Question 41

What are the effects of unemployment to the government?

Answer 41

As unemployment rises, government has to pay mor in jobseekers’ benefits and will receive less in tax.

Question 42

What are the effects of unemployment to society?

Answer 42

Unemployed resources represent an opportunity cost. Economy could produce more without anything being given up. We could all have better standards of living. Some people think unemployment causes crime, civil unrest and other social problems.

Question 43

What is the balance of payments?

Answer 43

A record of payments between one country and the rest of the world. It comprises the current, financial and capital accounts.

Question 44

What is the current account?

Answer 44

Records trade in goods, trade in services, investment income and current transfers.

• trade in goods measures movement of tangible products across international boarders. Trade in services measures movement of intangible output.
• investment income is measure of interest, profit and dividends that are rewards for capital investment in another country. Current transfers refer to movement of funds for which there is no corresponding trade in goods and services.

Question 45

Define current account surplus.

Answer 45

When inflows on current account of the balance of payments are greater than outflows.

Question 46

Define current account deficit.

Answer 46

When outflows on current account of the balance of payments are greater than inflows.

Question 47

What is the relationship between current account imbalances and other macroeconomic objectives?

Answer 47

Balance of payments deficit on current account becomes a problem when reserves of foreign currencies begin to run low and we say that a country isn’t paying its way. It might mean currency falls in value, which is inflationary. It might be a sign that the country is becoming uncompetitive, which can cause unemployment in domestic economy.

Question 48

The interconnectedness of economies through international trade.

Answer 48

International trade means that countries become interdependent, relying on each other both for income and for resources and goods and services. This reliance means that economies are increasingly connected and if one country or area suffers with weak demand this has direct effect on other countries.

Question 49

What is GNH?

Answer 49

Gross national happiness, measures quality of life in more holistic and physiological terms than only using GDP.

Question 49

What is the easterlin paradox?

Answer 49

The idea that happiness rises with average incomes, but only up to a point. Beyond this, marginal gains in happiness fall.