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