Measuring economic performance - the basics

Question 1

What are the 4 macro indicators?

Answer 1

• Rate of economic growth
• Level of unemployment
• Rate of inflation
• State of the balance of payments

Question 2

What are the governments macro objectives?

Answer 2

• Economic growth
• Low unemployment
• Low inflation
• Stable balance of payments

Question 3

How is economic growth measured?

Answer 3

Change in national output over a period of time

Question 4

What are the 2 ways in which output can be measured?

Answer 4

Volume - adding up the quantity of goods and services produced in one year
Value - calculating the value of goods and services produced in one year

Question 5

What is the rate of economic growth?

Answer 5

The speed at which the national output changes over a period of time

Question 6

What’s the formula for the rate of economic growth?

Answer 6

(Change in GDP/Original GDP) x 100

Question 7

What’s a boom?

Answer 7

Long periods of high economic growth rates

Question 8

What’s a recession?

Answer 8

negative economic growth for 2 consecutive quarters

Question 9

What’s an economic depression?

Answer 9

A sustained economic downturn which lasts a long period of time e.g several years

Question 10

What is nominal GDP?

Answer 10

GDP figure that hasn’t been adjusted for inflation

Question 11

What is real GDP?

Answer 11

GDP figure with the effect of inflation removed, for example if there was a 4% increase in nominal GDP during a period where inflation was 3%, real GDP rose by 1%

Question 12

What can GDP per capita indicate?

Answer 12

The standard of living in a country

Question 13

GDP per capita equation

Answer 13

Total GDP/Population = GDP per capita

Question 14

What is the Gross National Income (GNI) Indicator?

Answer 14

Income from a country’s investments abroad minus investments earned from foreign counties domestically

Question 15

What is the Gross National Product (GNP) Indicator?

Answer 15

Total output of the citizens of a country regardless of whether or not they’re a resident in that country

Question 16

How to calculate GNP and GNI per capita?

Answer 16

GNP or GNI/Population = per capita

Question 17

What’s the issue when using GDP, GNP, or GNI per capita to compare living standards in countries that use different currencies?

How can this problem be overcome?

Answer 17

The exchange rate might not reflect the true worth of the two currencies, therefore comparing in this way may not give an accurate picture.

This problem can be overcome by using purchasing power parity, this adjusts the per capita figures to take into account differences in purchasing power, with the results being expressed in USD.

Question 18

What does a high GDP and high GDP per capita suggest?

Answer 18

A high GDP suggests a country’s economic performance is strong and a high GDP per capita suggests that a country’s a high standard of living

Question 19

What are the limitations of using GDP and per capita figures for comparing countries?

Answer 19

• Hidden economy - economic activity that doesn’t appear in official figures
• Income inequality - Two countries may have a similar GDP per capita but the distribution of income between the rich and poor may be very different
• Other differences including working conditions and hours worked

Question 20

What do index numbers do?

Answer 20

Represent percentage change

Question 21

Why are index numbers useful?

Answer 21

Useful for making comparisons over a period of time, with the first year being called the base year and set at 100. Changes up or down from the base year are expressed as numbers above or below 100. Examples:

• A 3% rise in real GDP over one year would mean the index rose to 103 in year 2
• An index number of 108 in year 4 means an 8% rise from the base year

Question 22

What is the equation for calculating index numbers?

Answer 22

New Price/Base year price x 100

Example:

Average house price in the UK:
2010: £200,000 - 100 -
2011: £210,000 - 105 - 5% change

Question 23

Why are index numbers important?

Answer 23

• They allow for quick and easy comparisons between data
• They make changes between large numbers easy to see