Theme 2.1 Flashcards
What is economic growth?
Economic growth is the rate of change of output. It is an increase in the long term productive potential of the country which means there is an increase in the amount of goods and services that a country produces
How is economic growth typically measured?
This is typically measured by the percentage change in real GDP per annum. It can also be shown through the shift of PPF.
What is gross domestic product (GDP)?
This is typically measured by the percentage change in real GDP per annum. It can also be shown through the shift of PPF. GDP is an indicator of the standard of living in a country.
What is the difference between total GDP and GDP per capita?
Total GDP is represented by the overall GDP for a country, while GDP per capita is the total GDP divided by the size of the population.
When will GDP per capita grow?
GDP per capita grows if national output grows faster than population over a given time period, so there are more goods and services to enjoy per person.
What is the difference between real and nominal GDP?
Real GDP strips out the effects of inflation whilst nominal GDP does not. Real values can be described as the volume of national income i.e. the size of the basket of goods, whilst nominal values represent the value of the national income i.e. the monetary cost of this basket of goods. The value is equal to the volume times the current price level. The value of national income is its monetary value at the prices of the day; the volume is national income adjusted for inflation and is expressed either as index number or in money terms.
What is gross national income? (GNI)
The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends. This means that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home from the GDP. It is affected by profits from businesses owned overseas and remittances sent home by migrant workers. This is increasingly used rather than GDP because of the growing size of remittances and aid.
What is gross national product (GNP)?
The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically (GDP) and overseas. This means it is the value of all the goods produced by citizens of a country, whether they live in the country or not, whilst GDP is the value of all goods produced inside the country, whether they were produced by citizens of the country or not.
How can we compare economical growth overtime?
Changing national income levels will show us whether the country has grown or shrunk over a period of time.
-The data is compared to other countries to put figures in a context. Growth figures over a set period of time can be compared against similar countries to see whether the country has done well or not.
-The figures can also make judgements about economic welfare as growth in national income means a rise in living standards as the economy is producing more goods and services so people have access to more things.
-It is important to use real, per capita figures. If a country’s population grows over time, then this may cause a rise in GDP without a rise in living standards and so provide inaccurate comparisons. We use real GDP in order to strip out the effect of inflation. Inflation is rising prices and therefore can give the impression of GDP growing without any more services and goods being produced.
How can we compare economical growth between countries?
When countries have a difference in population, a difference in total GDP doesn’t necessarily mean a difference in living standards so to make comparisons, we work out GDP per capita. It is possible for GDP to increase simply because of an increase in prices in the country and inflation is different in every country, so real GDP figures need to be calculated.
What are purchasing power parities?
● An exchange rate of one currency for another which compares how much a typical
basket of goods in the country costs compared to one in another country. www.pmt.education
● They provide an alternative to using exchange rates for comparisons of GDP. ● These are useful when comparing countries as it takes into account the cost of living (how much has to be spent to maintain living standards), and so will help us better compare living standards. ● The difference between the highest and lowest GDPs will be smaller when PPP is used as poorer countries have a much lower cost of living than richer ones. For example, in Kenya £2 a day in their own currency is enough to survive on, whilst it isn’t in the UK. ● One example of this is the Big Mac Index, comparing the cost of the Big Mac throughout the world.
Why could GDP have inaccuracies within its data?
-Some countries are inefficient at collecting or calculating data and
therefore comparisons can become less effective.
-There is a ‘hidden’ or ‘black’ market in which people work without declaring
their income to avoid tax or to continue claiming benefits, and so GDP is underestimated because these incomes aren’t taken into account. This varies hugely between countries and may change overtime.
-GDP does not take into account home-produced services, for example in many poorer countries people work as subsistence farmers where they grow and consume their own crops without trading, and so the GDP is underestimated. This can also be true in the UK where DIY or the service of house-wives/husbands are not recorded.
-There can be small errors when calculating the inflation rate.
-Over time, methods used to calculate GDP will change and so therefore it can be difficult to compare countries overtime. Similarly, different countries may use different methods to calculate their GDP.
-Also, it is important to take away transfer payments, when money is paid to a person without any corresponding increase in output in the economy. For example, the government taxes people who are employed and then gives it straight to the people who are unemployed. Other examples include pocket money and the selling of second hand goods.
Why is inequality an issue when comparing with GDP?
An increase in GDP may be due to a growth in income of just one group of people and so therefore a growth in the national income may not increase living standards everywhere. Income distribution changes overtime and varies between countries so makes comparisons difficult
Why is quality of goods and services an issue when using GDP to make comparisons?
The quality of goods and services is much higher than those fifty years ago, but this is not necessarily reflected in the real price of these goods and services. Therefore, living standards may have increased more than GDP would suggest since the quality of goods and services has improved greatly. Improved technology may allow prices to fall, suggesting falling living standards, when this is not the case.
Why is comparing different currencies an issue when using GDP to make comparisons?
There are issues over which unit should be used to compare figures: they are usually converted into US dollars because of the size of the American economy. Some people argue that Purchasing Power Parity should be used to take into account the impact of differences in the cost of living in different countries.
Why can spending be an issue when using GDP to make comparisons?
Some types of expenditure, such as defence, does not increase standard of living but will increase GDP. For example, the GDP of the UK was higher during the Second World War than in the 1930s because a lot of money was spent on defence which increased GDP but it is difficult to argue that standard of living was higher in the Second World War. This therefore makes comparisons difficult as spending varies overtime and between countries.
What affects national happiness?
GDP only measures income but there are other factors affecting welfare. The UN happiness report found six key factors: real GDP per capita, health, life expectancy, having someone to count on, perceived freedom to make life choices, freedom from corruption, and generosity.
How does the UK measure national well-being?
● In 2010, the UK Prime Minister launched the Measuring National Wellbeing report to measure how lives are improving. They found that self-reported health, relationship status and employment status most affect personal well-being.
● They ask 4 key questions about life satisfaction, anxiety, happiness and worthwhileness, where people answer on a scale of 0 “not at all” to 10 “completely”. The report is now updated on a quarterly basis, rather than annually.
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● In 2012-2016, life satisfaction, happiness and worthwhile have continued to rise whilst anxiety levels fell but have begun to rise slightly. This could be as unemployment is falling/GDP is rising but concerns over global security could be causing anxiety.
How is real income and subjecting happiness correlated?
● One key finding of psychological research is that happiness and income are positively related at low incomes i.e. if you are poor and your income increases, you will be happier, but higher levels of income aren’t associated with increases in happiness i.e. rich people aren’t necessarily happy and increases in their income won’t necessarily make them happier. This is called the Easterlin Paradox. An increase in consumption of material goods will increase happiness if basic needs aren’t met (shelter and food), but once these needs are met, an increase in consumption won’t increase long term happiness. For example, in the UK as we already enjoy a high standard of living, even if GDP doubles, happiness will not increase.
● Another finding is that income and happiness depends on the people around us. For example, if you are the richest out of everyone you associate yourself with, then you will be happier than someone who has the exact same income but is the poorest out of everyone they associate with. Income is linked to social status and higher social status tends to make us happier.
What is inflation?
Inflation is the general increase of prices in the economy which erodes the value of money.
What is deflation?
Deflation is the fall of prices and indicates a slowdown in the rate of growth of output in the economy.
What is disinflation?
Disinflation is a reduction in the rate of inflation i.e. prices are still rising but they are not rising by as much.
What are indices in economics?
Nominal figures must be changed into real figures to make comparisons. This is done by choosing one year for the base year and adjusting all other figures into equivalent figures. In Britain, the most well-known indices are the retail price index (RPI) and the consumer price index (CPI). The base figure is given an index figure of 100 and all the figures before or after that time are then compared to that figure.
What is the consumer price index, and how is it calculated?
● The Office for National Statistics (ONS) collects prices on 710 goods and services from 20,000 shops in 141 locations and online sites and the prices are updated every month, with collectors visiting the same retailers to monitor identical goods. New items are added to the list every year, such as microwaveable rice and nail varnish, whilst others are taken away, including organic carrots.
● All these prices are combined using information on the average household spending pattern to produce an overall price index. The average household spending is worked out through the Living Costs and Food Survey, where around 5,500 families keep diaries of what they spend over a fortnight.
● It takes into account how much is spent on each item so they are weighted i.e. we spend more on petrol than on postage stamps so an increase in petrol will have a bigger impact on the overall rate of inflation.
What are the limitations of CPI?
● It is impossible for the figure to take into account every single good that is sold in the country and so therefore the CPI is not totally representative. Similarly, different households spend different amounts on each good and so therefore the CPI only measures an average rate of inflation, and is not totally representative.
● Moreover, it does not include the price of housing and so, since this has tended to rise more than the price of other goods, the data may be lower than it should be.
● Since the figure is more recent than RPI, it is difficult to make comparisons with historical data. It was only used since 1996 with estimates going back to 1988 which means that levels of inflation using CPI can only be accurately compared back to then.
Why do some people argue all inflation indices overestimate inflation?
Some people argue that all inflation indices overestimate inflation because they don’t take into account the fact that goods and services have improved in quality, and so will obviously be more expensive. For example, a car in the 1950s would be far less comfortable and reliable than today’s. It has no way of indicating the change of goods that is bought.
What is the retail price index? (RPI)
The RPI is very similar to the CPI. However, there are some differences between the data included and the way it is calculated.
● RPI includes housing costs such as mortgage and interest payments and council tax, whereas CPI does not.
● CPI takes into account the fact that when prices rise people will switch to product that has gone up by less. Therefore, the CPI is generally lower than the RPI.
● RPI excludes the top 4% of income earners and low income pensioners as they are not ‘average’ households whilst CPI covers all households and all incomes.
RPI is no longer considered as the best method and has had its national statistic status removed, although the Office for National Statistics still calculates it every month.
What are the three causes of inflation?
-Demand pull
-Cost push
-Growth of money supply
