Theme 2 - Measures of economic performance Flashcards
Gross Domestic Product
Measure of economic activity carried out in the domestic economy over a period.
Sum of output of good and services produced in an economy in a year.
sum of all incomes earned in a country in a year
sum of all expenditure in a year.
DOES NOT include earnings of residents while outside the country.
Actual economic growth
Increase in real incomes or GDP
Potential economic growth
This is the long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed.
Productivity
Measure of the efficiency of a factor of production
Economic growth
The rate of increase in GDP. - more spending, higher incomes and higher output in the economy.
difference between actual and potential economic growth
output gap
Eval. of increasing Incomes (GDP)
someone earns more; work longer hours, and have more work pressures or cost of living is higher such as increased mortgage payments.
Appl. of increasing gdp
country experiencing increases in incomes, output and spending- implies that better standard of living
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.-(includes a base year)
nominal values
values that are measured in money terms. Nominal figures are the unadjusted, current values.
gross national product (GNP)
total market value of all goods and services produced by domestic residents (GDP) plus income that residents have received from abroad, minus claimed by non-residents
gross national income (GNI)
GDP + net income from abroad
An evaluation of growth figures depends on
- how I well off the country is in the first place
- how much of the output is self consumed, does not appear as your GDP
- methods of calculation and reliability of data
- relative exchange rates-do they represent the purchasing power of the local currency
- type of spending by government-is money spent on welfare or on quality of life issues such as education and health
purchasing power parities (PPPs)
are when values are expressed in accordance with the amount that the currency will buy in the local economy.
Limitations of using GDP to compare living standards between countries and over time
- subsistence, barter and the hidden economy> farms consume their own output, good and services traded without the price system (barter), and goods paid for without being declared for tax purposes
- the informal economy
- currency values
- income distribution
- size of the public sector
- consumer and capital spending (living standards may increase in the future, but at the expense of living standards today.
- quality issues
public sector
Part of the economy controlled by the government
overcome limitations of measuring gdp
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gross national happiness (GNH)
And index designed in attempt to define an indicator and concept that measures quality of life in more holistic psychological terms then only using GDP. in the UK the ONS measures national well-being
inflation
a general sustained increase in prices, measured by a change in a weighted index of prices such as the consumer price index (CPI).
deflation
a fall in the general level of prices, i.e. negative inflation
disinflation
a fall in the rate of inflation, i.e. prices are rising more slowly.
Calculating the inflation rate in the UK
1) This is done using the Consumer Prices Index (CPI). It measures household purchasing power with the Family Expenditure SURVEY carried out by the office of national statistics (ONS). The survey finds out what consumers spend their income on. From this, a basket of goods is created. The goods are weighted according to how much income is spent on each item. Each year, the basket is updated to account for changes in spending patterns.
2) Price changes recorded once a month of 650 most common items and this is multiplied by the weights to give a price index.
Limitations of CPI when measuring inflation
- The basket of goods is only representative of the average household.
- only 57% respond to the survey and may not give accurate info
- housing cost not included-Housing costs account for about 16% of the index, yet this varies between people.
- unrepresentative for atypical spending patterns e.g. vegetarians and non-drivers
- CPI is slow to respond to new goods and services, even though it is updated regularly. Moreover, it is hard to make historical comparisons, since technology twenty years ago was of a vastly different quality, and arguably a different product altogether, than now.
Retail price index (RPI)
And index used to measure inflation that includes housing costs such as mortgage interest repayments.- RPI tends to have a higher value than CPI. But not as reliable for international comparisons and the statistical method of basing the data is also unique to the UK
Causes of inflation
- demand pull inflation
- cost push inflation
- money supply
Demand pull inflation
This is from the demand side of the economy. When aggregate demand is growing unsustainably, there is pressure on resources. Producers increase their prices and earn more profits. It usually occurs when resources are fully employed.
Cost push inflation
This is from the supply side of the economy, and occurs when firms face rising costs.
the main triggers for demand pull inflation are:
- A depreciation in the exchange rate, which causes imports to become
more expensive, whilst exports become cheaper. This causes AD to rise. - Fiscal stimulus in the form of lower taxes or more government
spending. This means consumers have more disposable income, so consumer spending increases. - Lower interest rates makes saving less attractive and borrowing more
attractive, so consumer spending increases. - High growth in UK export markets means UK exports increase and AD
increases.
cost-push inflation occurs when:
- Raw materials become more expensive, such as when oil prices rise.
- Labour becomes more expensive. This could be through trade unions,
for example. - Expectations of inflation- if consumers expect prices to rise, they may
ask for higher wages to make up for this, and this could trigger more inflation.
The effects of inflation on consumers
- real value of saving falls as price increases
- Those on low and fixed incomes are hit hardest by inflation, due to its regressive effect, because the cost of necessities such as food and water becomes expensive. The purchasing power of money falls, which affects those with high incomes the least.
- If consumers have loans, the value of the repayment will be lower, because the amount owed does not increase with inflation, so the real value of debt decreases.
The effects of inflation on firms
- Low interest rates means borrowing and investing is more attractive than saving profits. With high inflation, interest rates are likely to be higher, so the cost of investing will be higher and firms are less likely to invest.
- Workers might demand higher wages, which could increase the costs of production for firms.
- Firms may be less price competitive on a global scale if inflation is high, exports=expensive and imports=cheap. This depends on what happens in other countries, though.
- Unpredictable inflation will reduce business confidence, since they are not aware of what their costs will be. This could mean there is less investment.
- investment from abroad decreases
The effects of inflation on government
- The government will have to increase the value of the state pension and welfare payments, because the cost of living is increasing.
- redistribution of income-fixed income will fall and index-linked ones will not lose out
- reduction in real interest rate so cost of borrowing falls
The effects of inflation on Workers
- Real incomes fall with inflation, so workers will have less disposable income.
- If firms face higher costs, there could be more redundancies when firms try and cut their costs.
Level of employment
Number of people in work