Section 8 - Measuring Economic Growth

Question 1

What are the 4 main macroeconomic indicators?

Answer 1

>The 4 main macroeconomic indicators which can be used to measure a country’s economic performance are:
1. The rate of economic growth.
2. The rate of inflation.
3. The level of unemployment.
4. The state of the balance of payments.
>Governments use these indicators to monitor how the economy is doing.

Question 2

How can economic growth be measured?

Answer 2

>Economic growth can be measured by the change in national output of a period of time.
>Output can be measured in 2 ways:
1. Volume = adding up the quantity of goods and services produced in one year.
2. Value = calculating the value (£billions) of all the goods and services produced in one year.
>National output is usually measured by value - this is called the Gross Domestic Product (GDP).

Question 3

National output - definition

Answer 3

>All the goods and services produced by a country.

Question 4

GDP

Answer 4

>GDP is a measure of economic growth - it is all the goods and services produced by a country (national output).
>GDP can also be calculated by adding up the total amount of national expenditure in a year, or by adding up the total amount of national income earned in a year.
>This means that, in theory, national output = national expenditure = national income.

Question 5

Economic growth - definition

Answer 5

>The rate of economic growth is the speed at which the national output grows over a period of time.

Question 6

Economic growth - useful terms

Answer 6

>Over the course of several years, the speed of economic growth is not usually constant. Here are a few useful terms:

1. Long periods of high economic growth rates are often called booms.
2. If there’s negative economic growth for two consecutive quarters this is called a recession.
3. A long recession is often referred to as a slump.
4. An economic depression is worse than a recession - it’s sustained economic downturn which lasts for a long period of time (e.g. several years).

Question 7

What does a slow down in economic growth mean?

Answer 7

>The rate of economic growth is still rising just more slowly.

Question 8

Changes in GDP

Answer 8

>Over one year, a country’s GDP may increase or decrease.
>This measures the change in the amount of goods and services produced between one year and the next.
>Change can be shown in 2 ways:
1. Value (£billions).
2. Percentage.

Question 9

Measuring economic growth over time

Answer 9

>As a percentage.
>Change in GDP divided by original GDP x 100.

Question 10

GDP and inflation

Answer 10

>Some GDP growth may be due to prices rising (inflation).
>Nominal GDP is the name given to a GDP figure that hasn’t been adjusted for inflation.
>This figure is misleading - it’ll give the impression GDP is higher than it is.
>Economist remove the effect of inflation to find what’s called real GDP.
>E.g. 4% increase in nominal GDP when inflation was 3% means real GDP only rose by 1%. The other 3% was due to rising prices.

Question 11

What can you use to compare standards of living

Answer 11

1. GDP per capita.
2. Gross National Income (GNI) per captia.
3. Gross National Product (GNP) per capita.
4. Purchasing Power Parity (PPP).

Question 12

GDP per capita

Answer 12

>In theory, the higher the GDP per capita, the higher the standard of living in a country.
>Total GDP/population size.
>National output per person.

Question 13

GNI

Answer 13

>Gross National Income.
>GNI is the GDP plus net income from abroad - this net income is any income earned by a country on investments and other assets owned abroad, minus any income earned by foreigners or investments domestically.
>GNP per capita is used to compare living standards between different countries.

Question 14

GNP

Answer 14

>Gross National Product.
>GNP it the total output of the citizens of a country, whether or not they’re resident in that country.
>GNP per capita is used to compare standards of living.

Question 15

Boom - definition

Answer 15

>Long periods of high economic growth rates.

Question 16

Recession - definition

Answer 16

>If there’s negative economic growth for two consecutive quarters.

Question 17

Slump - definition

Answer 17

>A long recession.

Question 18

Economic depression - definition

Answer 18

>Sustained economic downturn which lasts for a long period of time (e.g. several years).

Question 19

PPP

Answer 19

>Purchasing Power Parity is used in comparisons of living standards.
>Purchasing power is the real value of an amount of money in terms of what you can actually buy with is.
>Varies between countries, in less developed ones $1 will buy more.
>Using PPP in comparisons of countries’ living standards involves adjusting the GDP per capita figures to take into account the differences in purchasing power in those countries, with the results usually expressed in US dollars.
>This makes for a more accurate and easier comparison.

Question 20

What problem does PPP overcome?

Answer 20

>When using GDP/GNI/GNP per capita to compare living standards in countries that use different currencies, the exchange rate might not reflect the true worth of the two currencies - so comparing GDP per capita in this way might not give an accurate picture.
>To overcome this problem, comparisons are usually carried out using the principle of PPP.

Question 21

GDP and GDP per capita - conclusions

Answer 21

>Used to compare the economic performance and standards of living in different countries.
>A high GDP would suggest a country’s economic performance is strong.
>A high GDP per capita suggests that a country’s standard of living is high.
>Limitations.

Question 22

What may GDP and GDP per capita not take into account?

Answer 22

>The extent of the hidden economy - economic activity that doesn’t appear in official figures.
>Public spending - some governments provide more benefits, such as unemployment benefits or free health care, than others. E.g. 2 countries may have similar GDP per capita figures but one country might spend much more money per person on providing befits that improve the standard of living.
>The extent of income inequality. 2 countries may have similar GDP per capita, but the distribution of that income between rich and poor may be very different.
>Other differences in the standard of living between countries, e.g. the no. of hours workers have to work per week, working conditions, the level of damage to the environment, and different spending needs (e.g. cold countries spend more income on heating to achieve the same level of comfort that exists in warm countries).

Question 23

Index numbers

Answer 23

>Index numbers represent percentage changes.
>They are useful for making comparisons over a period of time.
>The first year is called the base year - the index number for this year is set at 100.
>Calculate: value for current period divided by value for base period x 100.

Question 24

Why use index numbers?

Answer 24

>Allow for quick and easy data comparisons.
>Compare rate of change with very different sets of data e.g. £ and $.
>Less ugly.

Question 25

Cons of index numbers

Answer 25

>Tell us rate of increase but can’t compare actual prices.

Question 26

Inflation - definition

Answer 26

>2 ways to define inflation:

1. Inflation is the sustained rise in the average price of goods and services over a period of time. Keep in mind that; the prices of some goods may be rising faster than the average, some prices may be rising more slowly, some prices may even be falling.
2. Inflation can also be seen as a fall in the value of money. This means that; a fixed amount of money buys less than before, the purchasing power of money has fallen.

Question 27

What can inflation be?

Answer 27

>Positive or negative.
>Positive inflation is when the average price of goods and services is rising.
>Sometimes the average price will actually be falling. This is called negative inflation, or deflation.
>Other times, a country may experience hyperinflation. This is when prices rise extremely quickly and money rapidly loses its value.
>If the rate of inflation is slowing down, e.g. from 6% to 4%, this is called disinflation. Prices are still rising but at a slower speed.

Question 28

What are the 2 measurements used for inflation?

Answer 28

>The Retail Price Index (RPI).
>The Consumer Price Index (CPI).

Question 29

The Retail Price Index

Answer 29

>2 surveys are carried out to calculate RPI.
>The price changes in the 2nd survey are multiplied by the weightings from the first survey,
>These are then converted to an index number.
>So inflation is just the percentage change to the index number over time - e.g. if the index number rises from 100 to 102, then inflation is 2%.

Question 30

RPI - first survey

Answer 30

>The first survey is a survey of around 6000 households, called the Living Costs and Food Survey.
>This is used to find out what people spend their money on.
>The survey also shows what proportion of income is spent on these items.
>This is used to work out the relative weighting of each item e.g. if 20% is spent on transport then a 20% weighting will be given to transport.

Question 31

RPI - second survey

Answer 31

>The second survey is based on prices - it measures the changes in price of around 700 of the most commonly used goods and services (these goods and services are often referred to as the ‘basket of goods’).
>The items are chosen based on the Living Costs and Food Survey.
>What is in the survey changes over time, because technology, trends and tastes change. This ensures that the basket always reflects what the average household might spend its money on.

Question 32

Why are the weightings important in RPI?

Answer 32

>The weightings are important because the larger the proportion of a household’s income that’s spent on an item, the larger the effect a change in the price of that item will have on average spending.

Question 33

The Consumer Price Index

Answer 33

>CPI is calculated in a similar way to the RPI, but there are 3 main differences:
1. Some items are excluded from the CPI, the main ones being mortgage interest payments and council tax.
2. A slightly different formula is used to calculate the CPI.
3. A larger sample of the population is used for the CPI.
>The CPI is the official measure of inflation in the UK. Many other countries collect data on inflation ina similar way to the CPI, so it’s often used for international comparisons.

Question 34

What do the differences between the RPI and CPI mean?

Answer 34

>The CPI tends to be a little lower than the RPI - the exception is when interests are very low.
>However, they both tend to follow the same long-term trend.

Question 35

Limitations of the CPI and RPI

Answer 35

>Are useful, but have their limitations:

1. The RPI excludes all households in the top 4% of incomes. The CPI covers a broader range of the population, but it doesn’t include mortgage interest payments or council tax.
2. The information given by households in the Living Costs and Food Survey can be inaccurate.
3. The basket of goods only changes once a year - so it might miss some short-term changes in spending habits.

Question 36

Why are RPI and CPI important for government policy?

Answer 36

>The RPI and CPI are used to help determine wages and state benefits:
1. Employers and trade unions use them as a starting point in wage negotiations.
2. The government uses them to decide on increases in state pensions, and other welfare benefits.
3. Some benefits are index-linked - they rise automatically each year by the same percentage as the chosen index.
>THey’re also used to measure changes in the UK’s international competitiveness:
1. If the rate of inflations measured by the CPI is higher in the UK than in other countries it trades with, then UK goods become less price competitive, as they’ll cost more for other countries to buy.
2. So - exports will fall, imports, which will be made relatively cheaper by domestic inflation, will increase.

Question 37

Labour force - definition

Answer 37

>All the people who are willing and able to work.
>This includes those working and looking for work.

Question 38

Level of unemployment - definition

Answer 38

>The number of people looking for a job but cannot find one.

Question 39

Rate of unemployment - definition

Answer 39

>The number of people out of work as a percentage of the labour force.
>The rate of unemployment is used when making comparisons between countries, as different countries have different population sizes.

Question 40

What are the two ways of measuring unemployment?

Answer 40

1. The Claimant Count.
2. The Labour Force Survey.

Question 41

The Claimant Count

Answer 41

>The claimant Count is the number of people claiming unemployment-related benefits from the government, known as the Jobseeker’s Allowance (JSA).

Question 42

Advantages of using the claimant count to measure unemployment

Answer 42

1. This data is easy to obtain and there’s no cost in collecting data.
2. It’s updated monthly so it is always current.

Question 43

Disadvantages of using the claimant count to measure unemployment

Answer 43

1. It can be manipulated by the government to make it seem smaller - e.g., a change in the rules (like raising school leavers age to 19) could reduce the number of people who could claim JSA, which would make it seem that unemployment was falling.
2. It excludes those people who are looking for work but are not eligible to (or choose not to) claim JSA.

Question 44

The Labour Force Survey

Answer 44

>The International Labour Organisation (ILO) uses a sample of the population.
>It asks people who aren’t working if they’re actively seeking work.
>The number of people who answer ‘yes’ (whether they are claiming JSA or not) are added up to produce the ILO unemployment count.

Question 45

Advantages of using the Labour Force Survey to measure unemployment

Answer 45

1. It’s thought to be more accurate than the claimant count.
2. It’s an internationally agreed measure for unemployment, so it’s easier to make comparisons with other countries.

Question 46

Disadvantages of using the Labour Force Survey to measure unemployment

Answer 46

1. It’s less up to date than the claimant count because of the way the data is collected.
2. It’s expensive to collect and put together the data.
3. The sample may be unrepresentative of the population as a whole - making the data inaccurate.

Question 47

LFS vs CC

Answer 47

>The figure from the LFS tends to be higher than the claimant count because certain groups of people are excluded from the claimant count.
>For example, some people can’t claim JSA because they have a high earning husband/wife, or they might have too much money in savings.

Question 48

Costs of unemployment

Answer 48

>Unemployment comes at a cost to the whole economy.
>Governments want to keep track of unemployment figures for a number of reasons:
1. A high rate of unemployment suggests that an economy is doing badly.
2. Unemployment will lead to lower incomes and less spending. This will have an impact on companies too - they might sell fewer goods, or need to cut prices and make less profit.
3. Unemployment means there’s unused labour in the economy, so fewer goods and services can be produced.
4. It also means the government has extra costs, such as welfare benefits, and less revenue because less tax is paid.

Question 49

The Balance of Payments

Answer 49

>Refers to international flows of money.
>The balance of payments records:
1. The flow of money out of a country, e.g. to pay for imported goods.
2. The flow of money into a country, e.g. payments from exported goods.
>It’s the value of exports and imports that’s calculated in the balance of payments, not the volume.
>So if prices change, but volume remains the same, then the value of exports and imports will change.

Question 50

Current Account

Answer 50

>The main part of the balance of payments you need to know is the current account, which records the international exchange of goods and services.
>It consists of 4 sections.

Question 51

What are the 4 sections of the current account?

Answer 51

1. Trade in goods, often called ‘visible trade’ - so goods will either be visible imports or visible exports. E.g. cars, computers, food.
2. Trade in services, often called ‘invisible trade’. These can be imported or exported too. E.g. tourism, insurance, transport.
3. International flows of income earned as salaries, interest, profit and dividends. E.g. interest on an account held in a foreign country, dividends from a company based abroad.
4. Transfers of money from one person or government to another. E.g. foreign aid, transfer of money to or from a family member who lives in another country.

Question 52

Balance of payments - are they balanced?

Answer 52

>The flows of money coming into a country may not balance the flows of money out.
>If the money flowing in exceeds the money flowing out, there’s a surplus.
>If the money flowing out exceeds the money flowing in, there’s a deficit.

Question 53

UK - balance of payments

Answer 53

>In recent years, the UK has had a deficit in its balance of payments.
>Although the UK has usually had a surplus in invisible trade, it has also had a large deficit in visible trade.
>A deficit isn’t necessarily a bad thing - but it might be a sign that a country is uncompetitive.
>Governments want to avoid a large, long-term deficit - this would cause bigger problems, e.g. job losses.

Question 54

Why do economists look at development when looking at economic growth?

Answer 54

>It’s impossible to get a truly accurate measure of economic performance so sometimes economists include development to try and get a better overall impression.
>There are lots of ways to consider development.

Question 55

Why is development useful?

Answer 55

>Measuremennts of growth or unemployment are used to work out the standard of living in a country, but often those figures don’t tell the full story. A better way to look at a country’s standard of living is to measure its economic development.
>Measuring the economic development of a country means trying to work out the level of social and human welfare, sometimes called the quality of life.
>To measure development, economics need more indicators than just economic growth, inflation levels and unemployment rates, to be able to get a fuller picture of the quality of life in a country.
>This is especially important when comparing the economies of two very different countries.

Question 56

HDI - basic info

Answer 56

>The Human Development Index was developed by the UN to measure and rank countries’ levels of social and economic development.
>It considers a broader range of indicators.

Question 57

HDI - indicators

Answer 57

>The HDI includes social indicators to give a fuller picture of the quality of life in a country.
>The HDI combines indicators in 3 equally weighted sections:
1. Health (as measured by life expectancy).
2. Education (as measured by average and expected years in school).
3. Standard of living (as measured by real GNI per capita, using the principle of PPP).
>These figures are used because they are:
1. Fairly standard around the world.
2. Relatively easy to collect.

Question 58

How is HDI used?

Answer 58

>HDI can be used to measure changes in development levels over time in a country.
>It can also be used to compare levels of development between countries.
>Countries are either ranked in order with country number 1 being the highest.
>Or the HDI is given an index with a range between 0 and 1.
>1 is the highest.

Question 59

Criticisms of HDI

Answer 59

>A long life expectancy is not the same as a high quality of life (e.g. someone with a long life expectancy may have to work long hours in unpleasant conditions, or they might not have much freedom).
>Measuring the average number of years people spend in school doesn’t measure the quality of teaching or how well people learn what they’re taught.
>Using GNI-per-capita figures can lead to inaccurate comparisons - e.g., GNI per capita doesn’t include the hidden economy, and this tends to make up a larger proportion of the economy in less developed countries.
>The HDI figure alone doesn’t measure the extent of inequality in a country - a country with a satisfactory HDI rank might have a few very wealthy people and a large number of very poor people.

Question 60

Other ways to measure development other than HDI

Answer 60

1. Finding the percentage of adult male labour working in agriculture.
2. The number of mobile phones per thousand of the population.
3. Levels of disease.
4. Levels of malnutrition.
5. Newspapers bought per thousand of the population.
6. Energy consumption per head (electricity and gas).
7. Levels of political and social freedom.
8. Levels of environmental impact and sustainability.
9. Access to clean water.

Question 61

Development indicators - % of adult male labour working in agriculture

Answer 61

>Agricultural work is very hard and workers are often paid very little.
>The economic output from agriculture is generally quite low too.
>As countries become more developed they tend to use more machinery for farming and employ fewer workers.
>As a result, countries with a high percentage of the population working in agriculture generally have low levels of economic development.

Question 62

Development indicators - number of mobile phones per thousand of the population

Answer 62

>Mobile phones improve communication and trading, which can lead to greater economic development.
>A large number of mobile phones indicates that wages are high enough for people to afford to pay for them.

Question 63

GPI

Answer 63

>The Genuine Progress Indicator (GPI) attempts to improve on GDP as an economic indicator by including measures of the impact of economic growth on the environment, as well as various social factors.
>GPI takes GDP into account, but also measures the negative effects of growth (e.g. resource depletion and degradation) - the negatives of growth are subtracted from the positives.
>GPI also tries to get a fuller picture of people’s quality of life by measuring, e.g, the costs of crime and the value of volunteer work, housework and parenting.