2.1 Measures Of Economic Performance

Question 1

Gross National Product (GDP)

Answer 1

• the value of all goods / services provided in an economy in a given year (national output)
• an increase in GDP is a sign of economic growth, which leads to higher living standards and more employment opportunities

Question 2

real and nominal GDP

Answer 2

• nominal; the value of GDP based on current prices, without taking inflation into account
• real; GDP adjusted for inflation

Question 3

total and per capita GDP

Answer 3

• total; the combined monetary value of GDP
• per capita; the value of total GDP divided by the population of the country (useful for comparing standards of living between countries)

Question 4

value and volume of GDP

Answer 4

• value; monetary value of GDP which can be calculated by volume x current price level (i.e. it’s the nominal figure)
• volume GDP; the physical number of items produced

Question 5

other measures of national income

Answer 5

• Gross National Income (GNI); GDP plus net overseas income, i.e. interest payments and dividends
• Gross National Product (GNP); GDP plus income from abroad - income earned by overseas residents, e.g remittances
• GNP/capita provides a more realistic view of a country’s wealth than GDP/capita

Question 6

comparisons of growth rates between countries

Answer 6

• national income statistics help make comparisons between countries and over different time periods
• using real GDP/capita provides better info than real GDP as it considers population differences
• using real GNI/capita is more realistic for analysing income available per person than GDP/capita
• using real GNP/capita provides info on the income that’s actually within a country’s borders, which can be very different from GDP/capita

Question 7

purchasing power parities (PPP)

Answer 7

• a conversion factor that shows how much things would cost if all countries used the same currency
• e.g. if a basket of goods cost $150 in Vietnam after currency conversion and the same basket cost $450 in the US, PPP would be 1:3
• aims to make more accurate comparisons of the standard of living between countries where goods / services cost different amounts

Question 8

limitations of using GDP for comparisons

Answer 8

• doesn’t give any indication on the distribution of income, so 2 countries with similar GDP/ capita may have different distributions which lead to different living standards
• may need to be recalculated using PPP to account for international price differences
• large hidden economies, e.g. the black market, aren’t accounted for in GDP
• no indication of welfare
• no info on quality of goods/services, e.g. worse quality and lower prices will be judged as an increase in standard of living, when the poor quality may actually decrease it

Question 9

national happiness

Answer 9

• measured in the UK by the Office for National Statistics (ONS) through the Measuring National Wellbeing report
• happiness focuses on health, relationships, environment, education, satisfaction at work and living conditions
• yields more normative data
• the link between income and happiness found can be explained by the Easterlin Paradox which says that they’re positively related at low levels of income up to a certain point, after which higher income doesn’t lead to higher happiness

Question 10

inflation

Answer 10

• a sustained rise in the general price level over time
• macroeconomic objective for inflation to be @% (+/-1) in the UK
• it erodes the purchasing power of money

Question 11

deflation

Answer 11

• where the average price level falls, i.e. a negative inflation rate

Question 12

disinflation

Answer 12

• a lower rate of inflation, i.e. average price level is still rising but at a slower rate

Question 13

Consumer Price Index (CPI)

Answer 13

• measures change in consumer prices based on a basket of goods/services over time
• a household expenditure survey is conducted to determine what goes into a ‘household basket’ of around 700 goods
• each month, prices for these goods are gathered from 150 locations in the UK and averaged out
• the total price x weighting of all goods determines the final value of the basket
• CPI = cost of basket in year X / cost of basket in base year x 100
• measures average price change in goods and % difference in CPI between the years is the inflation rate
• it’s updated annually

Question 14

limitations of using CPI

Answer 14

• the basket of many households isn’t the average one
• different demographics have different spending patterns
• it’s slow to respond to new goods and services
• comparisons with other countries are less meaningful if they use another measure of inflation
• doesn’t capture the quality of products which changes over time so comparisons with different time periods are less useful
• prone to errors in data collection as it’s a small sample out of the entire population and respondents have no incentive to answer carefully and accurately

Question 15

Retail Price Index (RPI)

Answer 15

• calculated in the same way as CPI, but it includes other goods / services such as housing costs, council tax, payments on mortgage interest, etc.
• so it tends to have a higher value than CPI
• argued that it’s more accurate of a household’s inflation

Question 16

causes of inflation

Answer 16

• demand-pull
• cost-push
• growth of the money supply

Question 17

inflation; demand-pull

Answer 17

• when AD is growing unsustainably, there’s pressure on resources, so producers increase prices and earn more profits
• usually occurs when resources are fully employed so it causes upward pressure on prices due to shortages in supply
• main causes;
• depreciation in ER, so imports more expensive and exports cheaper, so AD rises
• fiscal stimulus through lower taxes or more govt. spending, so consumers have more disposable income and spend more
• lower IR makes savings less and borrowing more attractive, so consumer spending rises

Question 18

inflation; cost-push

Answer 18

• from the supply-side as it occurs when firms face rising costs, e.g. if;
• raw materials become more expensive, e.g. oil due to Russia-Ukraine war
• labour becomes more expensive, e.g. through trade unions
• indirect taxes which can increase costs of goods if producers pass costs onto consumers
• depreciation in ER which causes imports to be more expensive which increases prices of raw materials
• monopolies using their dominance to exploit consumers with high prices
• if consumers expect prices to rise, they may ask for high wages, which can trigger more inflation

Question 19

inflation; growth of the money supply

Answer 19

• if the BoE printed more money, there would be more money flowing in the economy
• extreme increases in money supply usually cause hyperinflation, when the rate of inflation is incredibly high and uncontrollable
• it’s only inflationary if the money supply increases at a faster rate than real output

Question 20

effects of inflation on consumers

Answer 20

• decrease in purchasing power
• fall in real income for those on fixed incomes / pension
• decrease in real value of savings

Question 21

effects of inflation on firms

Answer 21

• with high inflation, IR is likely to be higher so cost of investing will be higher and firms are less likely to invest
• workers may demand higher wages which can increase costs of production for firms
• firms may be less price competitive on a global scale
• unpredictable inflation reduces business confidence, so there may be less investment

Question 22

effects of inflation on workers

Answer 22

• real income falls with inflation, so workers will have less disposable income
• if firms face higher costs there could be redundancies as firms try and cut costs

Question 23

effects of inflation on the govt.

Answer 23

• trade-offs in tackling inflation, e.g. reducing it may increase unemployment
• govt. will have to increase the value of welfare payments and state pension as the cost of living rises

Question 24

measures of unemployment

Answer 24

• the claimant count
• the international labour organisation (ILO) and UK labour force survey (LFS)

Question 25

the claimant count

Answer 25

• counts the number of people claiming unemployment related benefits like Job Seeker’s Allowance (JSA) in the UK
• people claiming JSA have to prove they’re actively looking for work
• however, it generally underestimates the level of employment as not all unemployed people can claim JSA, e.g. if their partner’s are on high incomes

Question 26

the ILO and UK labour force survey

Answer 26

• the LFS is taken on by the ILO
• this extensive survey is sent to 60,000 UK households every quarter
• they have to determine if they meet the criteria of being out of work for 4 weeks, able to start work within 2 weeks, and have actively looked for work
• the same survey is used globally so it’s useful for making international comparisons
• since the part-time unemployed are less likely to claim unemployment benefits, this gives a higher figure than the claimant count

Question 27

unemployment and underemployment

Answer 27

• the unemployed are willing and able to work but aren’t employed
• the underemployed are those who have a job but their labour isn’t used to its full productive potential, i.e. those in part-time work looking for a full-time job
• unemployment figures don’t consider the underemployed, so they under represent the issue of joblessness

Question 28

employment rate

Answer 28

• no. in employment / population of working age x100
• rate may increase even as unemployment rate is increasing, e.g. increased immigration causes working age population to increase

Question 29

unemployment rate

Answer 29

• no. of those actively seeking work / total labour force x100
• doesn’t capture long-term unemployment, e.g. if workers give up looking for work and become inactive, it’ll improve the rate as fewer people are actively seeking work

Question 30

inactivity rate

Answer 30

• inactive people of working age / working age population x100
• the economically inactive are those who aren’t actively looking for jobs, e.g. those who have retired

Question 31

causes of unemployment

Answer 31

• structural unemployment
• frictional unemployment
• seasonal unemployment
• cyclical (demand deficiency) unemployment
• real wage (classical) unemployment

Question 32

structural unemployment

Answer 32

• occurs when there’s a mismatch between jobs and skills in the economy
• e.g. when industries are in decline and worker’s skills are becoming obsolete (out-dated), i.e. car manufacturing, coal and ship building
• worsened by immobility of labour as they’re likely to remain unemployed in the long-run
• globalisation / technological change contributes to it as manufacturing sectors move production abroad to countries with lower labour costs / workers are replaced by machinery

Question 33

frictional unemployment

Answer 33

• usually short-term unemployment as it occurs when workers are between jobs
• always exists as there will always be people moving between jobs
• e.g. time between graduation and finding a job or between leaving / being made redundant and finding a job

Question 34

seasonal unemployment

Answer 34

• occurs when labour isn’t required in some seasons
• e.g. during summer, more people will be employed in the tourist industry, when demand increases

Question 35

cyclical unemployment

Answer 35

• caused by a fall in AD in an economy
• labour demand is a derived demand, so as AD falls, output falls and firms lay off workers as they need to cut costs to maintain profits
• e.g. during a recession

Question 36

real wage (classical) unemployment

Answer 36

• occurs when wages are inflexible at a point higher than the free-market equilibrium wage
• usually caused by minimum wages, e.g. NMW
• higher wage create an excess supply of labour which represents this unemployment

Question 37

significance of migration on employment / unemployment

Answer 37

• migrants are usually of working age, so the supply of labour tends to increase with more migration
• if migrants come in and fill vacancies, there will be an increase in employment
• however this increased supply of labour may push down wages for low skilled jobs, as firms can hire more workers if average wages are lower
• if they don’t find work or displace others from jobs, then employment remains unchanged and unemployment may increase

Question 38

significance of skills for employment / unemployment

Answer 38

• generally, a higher skilled work force is more employable
• so, the skills of the workforce need to continuously improve to maintain employment, or else structural unemployment will occur
• e.g. many engineering vacancies but many people don’t have the right skillset

Question 39

costs of unemployment

Answer 39

• consumers; lower standard of living as they have to spend less, and the stigma of being unemployed is a psychological barrier
• firms; falling sales, revenue and profits as there’s less consumer spending, and in the long-run there may be a smaller pool of labour
• govt; lower tax revenues, i.e. income tax, and higher expenditure on benefits, e.g. JSA
• workers; taxpayers may more to cover for increased govt. spending
• society; high unemployment means economy is operating below full capacity and is inefficient, leading to lower output and a fall in GDP. areas of high unemployment tend to have increased crime as it becomes run-down, e.g. with shop closures, limited money / space in households, etc.

Question 40

balance of payments

Answer 40

• a record of all financial transactions made between one country and the rest of the world
• states the value of exports (inflows) and how much is spent on imports (outflows)
• made up of;
• the current account (goods / services)
• the capital account (fixed assets, e.g houses)
• the financial account (financial assets)

Question 41

the current account of the balance of payments

Answer 41

• considered the most important account
• records the net income an economy gains from international transactions
• exporting goods (visible) / services (invisible) = money comes in
• importing goods (visible) / services (invisible) = money comes out

Question 42

current account deficits and surpluses

Answer 42

• deficit; when imports > exports (value of outflows is greater than value of inflows)
• surplus; when exports > imports (value of inflows is greater than value of outflows)
• UK aims to get their current account balance as close to equilibrium as possible, but it’s running a current account deficit
• export led economic growth helps it and rising imports makes it worse

Question 43

relationship between current account imbalances and other macroeconomic objectives

Answer 43

• a trade-off may occur as setting policies to target one macroeconomic objective may complicate the possibility of achieving another one
• e.g. an improved current account on the balance of payments may occur due to decreased demand for imports which may be due to a recession, meaning there’s high unemployment - the govt. don’t want this as they aim for export led economic growth

Question 44

the interconnectedness of economies through trade

Answer 44

• high interdependence between economies, so economic conditions in one country affect another, as the quantity they import / export will change
• e.g. Ukraine war showed how disruptions in one part of the world caused widespread issues in others