week 2 Flashcards
Production and Growth
what is Real GDP per person?
a measure of living standards
it varies widely over time + from country-country
what is the growth rate?
growth in real GDP/person
ALWAYS CHECK wether its REAL or NOMINAL GDP
expressed as a %
why is the growth rate hugely important
even a small change in a country’s growth rate can make a significant difference over several generations due to compounding
what is compounding?
Compounding refers to the process by which an investment or economic output generates earnings or returns, and these earnings are reinvested or added back to the original amount, leading to exponential growth over time
– Compounding is like a snowball effect for money. You earn interest on our initial investment, then that interest gets added to your investment, so you earn even more interest next time.
what was the growth of GDP in UK in 2020 Q2 compared to Q2 in 2023
2020: -20.3%
2023: 0%
what causes long run economic growth?
2 causes
- proximate causes
- fundamental causes
fundamental causes - the “drivers” of proximate causes (such as capital
how do you calculate the inflation rate?
100 x [pt/p(t-1)-1]
if p(t-1) = 1 and p(t) = 1.2 then what is the inflation rate?
100 x ((1.2-1)/1)
= 20
What is the word definition of inflation rate?
relative change in a price index
What is CPI?
CPI measures the overall lvl of prices of goods + services bought by consumers
how to calculate CPI?
compute the cost of a fixed basket of goods in different years
CPI formula?
how to compute the inflation rate from CPI?
how does CPI differ to CPIH?
the H stands for Housing - which
- includes housing costs and council tax
- CPI doesn’t include mortgage interest payments and council tax so CPIH is arguably better measure of Cost of Living
what is the PPI?
the PPI measures the cost of a basket of g/s bought by firms
what r changes in PPI thought 2 be useful for?
predicting changes in CPI bc firms pass on casts to consumers in form of higher prices
What are personal price indices?
Personal price indices are specific measures of inflation that are tailored to the buying habits of an individual or specific group.
– can vary greatly from standard inflation measures like the CPI (Consumer Price Index), as they take into account the specific products and services that a particular individual or group tends to purchase.
why care about inflation?
[2]
- inflation directly impacts individuals purchasing power
- inflation has other important macroeconomic consequences
what are some macroeconomic consequences inflation might have?
5
- Erodes purchasing power: Persistent inflation can lead to a decrease in the purchasing power of money, meaning the same amount of money buys less over time.
- Distorts spending habits: High inflation can lead to people spending their money quickly before it loses more value, or hoarding goods due to fear of future price increases.
- Causes uncertainty: Inflation can cause economic uncertainty, leading to lower investment and savings.
- Income redistribution: Inflation can redistribute income from savers to borrowers if interest rates don’t keep up with inflation.
5.International competitiveness: If a country’s inflation is higher than its trading partners, its goods may become more expensive leading to a decrease in competitiveness.
wat r the problems w CPI?
[4]
- SUBSTIUTION BIAS - some goods’ prices rise more than others and so consumers will substitute toward goods that hv become relatively less expensive BUT the index assumes a fixed basket of goods and overstates inflation
- NEW GOODS - a gr8er variety of goods makes £ more valuable so the cost of living has delcined - but basket of goods in the index is updated only at a lag
- unmeasured quality change - need to adjust prices to reflect quality changes… when a good becomes better, its price has effectively fallen as your £ goes further
- refers to an avg individual
GDP deflator vs CPI
GDP deflator is the ratio of nominal GDP : real GDP
it reflects prices of all goods + services produced domestically
whereas CPI/PPI reflects prices of goods + services bought by consumers/firms
what does the CPI exclude?
council tax + mortgage interest payments
Can the GDP deflator and CPI inflation differ?
Yes. For ex. if oil prices rice, CPI inflation in the UK goes up by MORE than the GDP deflator as oil makes up a larger share of consumer spending than of GDP
but the two measures of inflation generally move together.
how to compare a £ today vs a £ in year T?
what is indexation?
Automatic correction by law/contract of a £ for the effects of rises in the cost of living
e.g if you have an indexed pension, the price of the pension will increase in line with inflation to match rise in living costs
There so inflation does not erode the real value of money over time
loan ________ and ______ _______ also commonly follow indexation rules to ______________.
Loan Repayments and Savings Accounts also commonly follow indexation rules to protect the value of money against inflation.