2.1 MEASURES OF ECONOMIC PERFORMANCE

Question 1

i. What is Gross Domestic Product?

Answer 1

-the total value of goods produced and services provided in a country during one year.

Question 2

ii. Explain the difference between Real and Nominal GDP, giving an example where we might want to use each

Answer 2

-Real GDPis a macroeconomic statistic that measures the value of the goods and services produced by an economy in a specific period, adjusted for inflation. Nominal GDP isGDP given in current prices, without adjustment for inflation.

Question 3

iii. Explain the difference between total and per capita GDP, giving an example where we might want to use each

Answer 3

-Per capita GDP is a country’s economic output per person, calculated by dividing the GDP of a nation by its population. Total GDP is all goods and services produced within a country during a period of time (typically 1 year)

Question 4

iv. Explain the difference between value and volume of, for example, exports

Answer 4

-Value is the measurement of the benefit an individual gets from a good or service. Volume isthe amount of goods and services traded over a period of time, often over the course of a day

Question 5

v. Explain the difference between GNP and GNI

Answer 5

GNP is the total market value of the final goods and services owned by a nation’s economy during a specific period of time (usually a year). GNI is the gross domestic product, plus net receipts from abroad of compensation of employees, property income and net taxes less subsidies on production

Question 6

vi. Why must we be careful when comparing GDP across different countries?

Answer 6

-The true value of public goods (such as defence and transport infrastructure) and merit goods, (such as healthcare and education) is largely unknown. This meansit is difficult to compare two countries with very different spending on these goods and assets

Question 7

vii. Why must we be careful when comparing GDP over time?

Answer 7

-the number of hours worked to generate a given level of income may be quite different

Question 8

viii. What is meant by ‘Purchasing Power Parity’?

Answer 8

-Purchasing power parity is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries’ currencies, and, to some extent, their people’s living standards

Question 9

ix. Why might PPP be useful?

Answer 9

-allows for economists to compare economic productivity and standards of living between countries

Question 10

x. How is the ONS National Wellbeing indicator measured?

Answer 10

-The measures include bothobjective data (for example, unemployment rate) and subjective data (for example, satisfaction with job)to provide a more complete view of the nation’s progress than economic measures such as gross domestic product (GDP) can do alone.

Question 11

xi. What does the Easterlin Paradox show?

Answer 11

-The Easterlin Paradox states thatat a point in time happiness varies directly with income, both among and within nations, but over time the long-term growth rates of happiness and income are not significantly related

Question 12

xii. Suggest why this might be the case

Answer 12

-people that gain large sums of money early on will have a greater satisfaction as they aren’t used to it, whereas people will who already have great sums of money will have lower satisfaction with their already large income

Question 13

xiii. Explain what happened to GDP and life satisfaction between 2007 and 2014 (see PMT)

Answer 13

-There was a global recession that took place as well as a recovery so people would have had less money during this time and as a result would have a lower life satisfaction but would rise again as the economy began to recover

Question 14

i. What is inflation?

Answer 14

-a general increase in prices and fall in the purchasing value of money

Question 15

ii. What is deflation?

Answer 15

-reduction of the general level of prices in an economy

Question 16

iii. What is disinflation?

Answer 16

-reduction of the level of inflation

Question 17

iv. Explain how CPI is calculated

Answer 17

-divide the cost of the market basket in year t by the cost of the same market basket in the base year. The CPI in 1984 = $75/$75 x 100 = 100 The CPI is just an index value and it is indexed to 100 in the base year, in this case 1984. So prices have risen by 28% over that 20 year period.

Question 18

v. Give 3 limitations of CPI as a measure of inflation

Answer 18

-The Consumer Price Index may not be applicable to all population groups. …

-CPI doesn’t produce official estimates for subgroups of a population.

-CPI is a conditional cost-of-living measure and does not measure every aspect that affects living standards.

-Two areas can’t be compared.

Question 19

vi. How often is CPI and RPI calculated?

Answer 19

-Currently, around 180,000 separate price quotations are collectedevery monthin order to compile the indices, covering over 720 representative consumer goods and services. These prices are collected in around 140 locations across the UK, from the internet and over the phone

Question 20

vii. Approximately many goods and services are in the basket?

Answer 20

Currently, the consumer price index (CPI) is calculated by taking into consideration299 items

Question 21

viii. At approximately how many locations are price data taken?

Answer 21

-140 locations across the UK, from the internet and over the phone

Question 22

ix. How often are weightings updated?

Answer 22

-Every month

Question 23

xi. Explain the difference between CPI and RPI

Answer 23

-The CPI mostly uses a geometric mean to aggregate price changes, whereas in the RPI an arithmetic mean is used

Question 24

xiii. What is CPIH?

Answer 24

-theConsumer Prices Index including owner occupiers’ housing costs

Question 25

xiv. Explain what is meant by ‘cost push’ inflation

Answer 25

-Cost-push inflation (also known as wage-push inflation)occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials

Question 26

xv. Give 3 possible causes of cost push inflation

Answer 26

-Monopolies

-Natural Disasters

-Wage Inflation

-Exchange rates

-Government regulation and taxes

Question 27

xvi. Explain what is meant by ‘demand pull’ inflation

Answer 27

-Demand-pull inflation isthe upward pressure on prices that follows a shortage in supply

Question 28

xvii. Give 3 possible causes of demand pull inflation

Answer 28

-A growing economy: When consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices.

-Increasing export demand: A sudden rise inexportsforces an undervaluation of the currencies involved.

-Government spending: When the government spends more freely, prices go up.

-Inflation expectations:Companies may increase their prices in expectation of inflation in the near future.

-More money in the system: An expansion of themoney supply with too few goods to buy makes prices increase.

Question 29

xxi. Explain the effects of inflation on consumers/workers

Answer 29

-rising prices inevitablyreduce the purchasing power of some consumers

-workers start demanding larger wage increases

Question 30

xxii. Explain the effect of inflation on firms

Answer 30

-Firms generally prefer inflation to be low and stable.If inflation rises above 3 or 4%, firms may see a rise in costs and uncertainty

Question 31

xxiii. Explain the effect of inflation on the government

Answer 31

High inflation can cause GDP growth to slowdown – leading to lower tax revenues & increased borrowing

Question 32

xxiv. Explain possible benefits of inflation

Answer 32

-More dollars translates to more spending, which equates to more aggregated demand. More demand, in turn, triggers more production to meet that demand

Question 33

i. What is meant by ‘unemployment’?

Answer 33

people who are not working, the state of being unemployed

Question 34

ii. What is the Claimant Count?

Answer 34

-The Claimant Countrecords the number of people claiming unemployment-related benefits

Question 35

iii. Give a reason why this may not be accurate

Answer 35

-not everybody claims unemployment benefits

Question 36

v. What is the ILO measure of unemployment?

Answer 36

-The unemployment rate is calculated by expressing the number of unemployed persons as a percentage of the total number of persons in the labour force

Question 37

v. Give a reason why this might not be accurate

Answer 37

-Doesn’t consider people not in the labour force

Question 38

vi. Which of the two measures is typically higher and why?

Answer 38

-The claimant count is higher as workers only need to be available for work for one hour per week. Therefore, part-time unemployment is included in the measurement, though these workers are unlikely to claim unemployment benefit

Question 39

vii. What is meant by ‘underemployment’

Answer 39

-the condition in which people in a labour force are employed at less than full-time or regular jobs or at jobs inadequate with respect to their training or economic needs

Question 40

viii. Why did this become more relevant post-Financial Crisis?

Answer 40

-People needed better paid jobs in order to fully recover from the crisis

Question 41

ix. What is meant by ‘employment’?

Answer 41

-the state of having paid work

Question 42

x. What is meant by ‘economically inactive’?

Answer 42

-People not in employment who have not been seeking work within the last 4 weeks and/or are unable to start work within the next 2 weeks

Question 43

xi. What is the difference between the population of a country and its labour force?

Answer 43

-The population of the country is the total number of people living in the country whereas the labour force is the total number of people in work or looking for work

Question 44

xii. Why do we find that Employment and Unemployment sometimes rise at the same time?

Answer 44

-To calculate the unemployment rate, you’d take the number of unemployed divided by the labour force. And the labour force = the number of people employed plus those who are unemployed. So yes,we can have an increase in the number of people who are employed as more of the unemployed gain a job

Question 45

xiii. What are the current retirement ages in the UK?

Answer 45

-66

Question 46

xiv. What is a ‘discouraged’ worker?

Answer 46

-These arepersons who, while willing and able to engage in a job, are not seeking work or have ceased to seek work because they believe there are no suitable available jobs

Question 47

xv. What is ‘structural unemployment’?

Answer 47

-unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand

Question 48

xvi. What is ‘frictional unemployment’?

Answer 48

-the unemployment which exists in any economy due to people being in the process of moving from one job to another

Question 49

xvii. What is ‘seasonal unemployment’?

Answer 49

-when people who work in seasonal jobs become unemployed when demand for labour decreases

Question 50

xviii. What is ‘demand deficient-’ or ‘cyclical unemployment’?

Answer 50

-the impact of economic recession or expansion on the total unemployment rate

Question 51

xix. What is ‘real wage flexibility’?

Answer 51

-Wage flexibility is broadly defined to encompassthe nature of pay regulation under collective bargaining, in particular tendencies to decentralisation and also to specific schemes that deliver pay variation in practice

Question 52

xx. Which of these types of unemployment is most likely to result in long term unemployment?

Answer 52

-Structural, because this type of unemployment requires retraining to acquire new job skills

Question 53

xxi. How would a lack of skills in an economy effect the unemployment rate?

Answer 53

-Increase it as those unemployed would need to gain new skills in order to gain jobs

Question 54

i. What is the Balance of Payments?

Answer 54

-the difference in total value between payments into and out of a country over a period

Question 55

iii. What is meant by a current account surplus?

Answer 55

-a positive current account balance, indicating that a nation is a net lender to the rest of the world

Question 56

iv. What is meant by a current account deficit?

Answer 56

-the shortfall between the money received by selling products to other countries and the money spent to buy goods and services from other nations

Question 57

v. When might a current account deficit be considered a problem?

Answer 57

-If a current account deficit is financed through borrowing it is said to be more unsustainable. This is becauseborrowing is unsustainable in the long term and countries will be burdened with high-interest payments

Question 58

vi. How might a current account deficit affect unemployment?

Answer 58

-if an increase in a country’s trade deficit causes job losses in the economy, we might expectan increase in the unemployment rate
to occur as well

Question 59

vii. How might a current account deficit affect inflation?

Answer 59

-an increase in the current account deficit by 1% leads to lower domestic inflation by 0.03% in the long term