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Economics Theme 2 > 2.1- measures of economic performance > Flashcards

2.1- measures of economic performance Flashcards

1
Q

When does economic growth occur?

A

When there is a rise in the value of GDP

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2
Q

What is GDP?

A

GDP measures the quantity of goods and services produced in an economy.

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3
Q

What is real GDP?

A

The value of GDP adjusted for inflation.

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4
Q

What is nominal GDP?

A

The value of GDP without being adjusted for inflation.

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5
Q

What is total GDP?

A

The combined monetary value of all goods and services produced within a country’s borders during a specific time period.

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6
Q

What is GDP per capita

A

The value of total GDP divided by the population of the country.

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7
Q

What is volume of GDP?

A

GDP adjusted for inflation. The size of the basket of goods and the real level of GDP.

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8
Q

What is value of GDP?

A

The monetary value of GDP at prices of the day. It is the nominal figure and can be calculated by volume x current price level.

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9
Q

How else can national income be measured?

A
  • Gross national product (GNP)
    -Gross national income (GNI)
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10
Q

What is GNP?

A

The market value of all products produced in an annum. It includes GDP plus income earned from overseas assets - income earned by overseas residents.
GDP is only within country’s border whist GNP includes products outside the border too.

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11
Q

What is GNI?

A

The sum of value added by all producers who reside in a nation. It includes what a country earns from overseas and removes any money that is sent back home by foreigners in that country.

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12
Q

What is purchasing power parity (PPP)?

A

Theory that estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent, according to each currency’s purchasing power.

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13
Q

What are some limitations of using GDP to compare living standards?

A
  • GDP does not give any indication of the distribution of income.
  • GDP may need to be recalculated in terms of purchasing power.
    -Large hidden economies, such as the Black market which are not accounted for in GDP.
  • GDP gives no indication of welfare, such as happiness index.
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14
Q

What did the UN happiness report find that the six factors which affect national wellbeing are?

A

-Real GDP per capita.
-health
-life expectancy
-having someone to count on
-freedom for life choices
-freedom from corruption and generosity.

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15
Q

What did the UN happiness report find that the six factors which affect national wellbeing are?

A

-Real GDP per capita.
-health
-life expectancy
-having someone to count on
-freedom for life choices
-freedom from corruption and generosity.

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16
Q

What is the relationship between real incomes and subjective happiness?

A

The UK economy grew by 5% in GDP per capita but showed no change in life satisfaction.
However, generally, the higher the GDP per capita, the higher the average life satisfaction score.

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17
Q

Are happiness and income always related?

A

Tend to be positively related at low levels of income.
Once basic needs are met, higher income does not lead to increased happiness.

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18
Q

What is inflation?

A

The sustained rise in general price level over time. The cost of living increases, and the purchasing power of money decreases.

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19
Q

What is deflation?

A

Opposite of inflation. Average price level in the economy falls.

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20
Q

What is disinflation?

A

The falling rate of inflation. Average price level is still rising, but to a slower extent.

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21
Q

How is inflation calculated in the UK?

A

Consumer price index (CPI)

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22
Q

What is CPI?

A

Measures household purchasing power with the family expenditure survey.

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23
Q

Steps on calculating inflation using CPI?

A

1)Survey finds out what each household spends their income on.
2) From this a basket of goods are created, the goods are weighted to how much income is spent on each item. Petrol has a higher weighting than tea.
3)Each year, basket is updated to account for changing in spending patterns.

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24
Q

What does Uk government want inflation to be?

A

2%

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25
Q

What are the limitations of CPI when measuring inflation?

A

-Basket of goods is only representative of the average household, not accurate for households who do not own cars.
-different demographics have different spending patters.
-CPI is slow to respond to new goods and services.
-Hard to make historical comparisons, since technology twenty years ago was very different.

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26
Q

What is an alternative measure of inflation?

A

Retail price Index (RPI)

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27
Q

What does RPI include?

A

Housing costs, such as payments on mortgage interest and council tax. Meaning higher value than CPI

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28
Q

Who does RPI exclude?

A

Top 4% of earners.
Low income pensioners.

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29
Q

What does CPI take into account that RPI does not?

A

CPI takes into account that when prices rise people switch to product that has gone up less

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30
Q

What are the causes of inflation?

A

Demand pull
Cost push
Growth of money supply

31
Q

How does demand pull cause inflation?

A
  • When aggregate demand is growing unsustainably, there is pressure on resources. Producers increase their prices and earn more profits.
32
Q

What causes demand pull inflation?

A
  • depreciation in exchange rate- imports more expensive, exports cheaper- AD rises.
  • Fiscal stimulus- lower taxes more government spending- consumers have more income, spending goes up.
  • Lower interest rates- saving less attractive, borrowing and spending more attractive, spending goes up.
  • High export growth in UK export markets- UK exports increase-AD increases.
33
Q

What is cost push inflation?

A
  • from supply side of the economy and occurs when firms face rising costs.
34
Q

What causes cost push inflation?

A
  • Raw materials become more expensive, when oil prices rise.
  • Labour becomes more expensive.
  • Expectations of inflation- if consumers expect prices to rise, may ask for higher wages.
  • Indirect taxes- increase cost of goods such as cigarettes and fuel.
  • depreciation in exchange rates- imports are more expensive, raw material price goes up.
  • monopolies- using dominant market position to exploit consumers with high prices.
35
Q

What are the effects of inflation on consumers?

A

-low fixed incomes get hit the hardest- regressive effect.
-the cost of food and water becomes expensive.
-If consumers have loans, the value of repayment will be lower, however the amount owned does not increase with inflation.

35
Q

What are the effects of inflation on consumers?

A

-low fixed incomes get hit the hardest- regressive effect.
-the cost of food and water becomes expensive.
-If consumers have loans, the value of repayment will be lower, however the amount owned does not increase with inflation.

36
Q

What are the effects of inflation on firms?

A

-low interest rates means borrowing and investnig is more attracttive.
-High inflation, interest rates will usually be high, so the cost of investing will be higher.
-Workers might demand higher wages, which could increase the costs of production for firms.
-Firms may be less price competitive on a global scale if inflation is high. This also depends on what happens in other countries.
-Unpredictable inflation will reduce business confidence, since they are not aware of what their costs will be. This means less investment

37
Q

What are the effects of inflation on the government?

A

The government will have to increase the value of the state pension and welfare payments due to cost of living increasing.

38
Q

What are the effects of inflation on workers?

A

-Real incomes fall with inflation, so workers will have less disposable income.
-If firms face higher costs, there could be more redundancies when firms try to cut their costs.

39
Q

What are the effects of inflation on workers?

A

-Real incomes fall with inflation, so workers will have less disposable income.
-If firms face higher costs, there could be more redundancies when firms try to cut their costs.

40
Q

Why is it difficult to measure unemployment?

A

Some of those in employment might claim unemployment related benefits, whilst some of the unemployed might not reveal this in a survey.

41
Q

What are the two main measures of unemployment in the UK?

A

-The claimant count
-The labour force survey- taken on by the international labour organisation

42
Q

How does the claimant count measure unemployment?

A

-Counts the number of people claiming unemployment related benefits such as Job’s seekers allowance.
-They have to prove they are actively looking for work.

43
Q

Evaluation points for the claimant count?

A

-Not every unemployed person is eligible for, or bothers claiming JSA.
-Those with partners on high incomes will not be eligible for the benefit.
-the method generally underestimates the level of unemployment.

44
Q

How does the UK labour force survey measure unemployment?

A

It directly asks people the following:
- Been out of work for 4 weeks.
-Able and willing to start working in 2 weeks.
-Workers should be available for 1 hour per week. Part time unemployment is included.

45
Q

Why does the labor force survey give a higher figure than the claimant count?

A

The part time unemployed are less likely to claim unemployment benefits in the claimant count.

46
Q

What is the difference between unemployment and underemployment?

A

The unemployed are those able and willing to work, but are not employed. They are actively seeking work.
The underemployed are those who have a job, but their labour is not used to its full productive potential.
Those who are in part-time work but are looking for full time jobs are uneremployed.

47
Q

How does unemployment effect consumers?

A
  • Less disposable income and their standard of living may fall.
    -Affect mental health of workers.
48
Q

How does unemployment effect firms?

A
  • With a higher rate of unemployment, firms have a larger supply of labour to employ from. This causes wages to fall, firms can reduce costs.
    -However, unemployment means less income for consumers and so they spend less. Firms may lose profits.
    -Producers which sell inferior goods might see a rise.
    -Might cost firms to retrain workers if they’ve been out of work for a long time.
49
Q

How does unemployment effect workers?

A
  • There is a waste of worker’s resources.
    -They could lose their existing skills if they are not fully utilized.
50
Q

How does unemployment effect the government?

A

If the unemployment rate increases, the government may have to spend more on JSA.
-Money could be invested elsewhere.
-Government would receive less revenue from income tax and from indirect taxes on expenditure.

51
Q

How does unemployment effect society?

A

Opportunity cost to society, workers could have produced goods and services if they were employed.
-Could be negative externalities in the form of crime and vandalism.

52
Q

What does economically inactive mean and who could it include?

A
  • those who are not actively looking for work.
    -carers for the elderly, disabled or children, those who are retired.
53
Q

What are the 5 causes of unemployment?

A
  • structural unemployment
  • frictional unemployment
    -seasonal unemployment
  • cyclical unemployment
    -real wage inflexiblity
54
Q

What is structural unemployment?

A
  • occurs with a long term decline in demand for goods in an industry, causing job losses.
55
Q

Example of structural unemployment in the UK:

A
  • car manufacturing
    -coal and ship building
56
Q

Why does structural unemployment occur?

A

geographical and occupational immobility of labour.
Workers do not have the transferable skills to move to another industry.
-not easy to move somewhere where jobs are available.

57
Q

How does globalisation contribute to structural unemployment?

A

production in the manufacturing sectors, such as in clothing moves abroad to countries with lower labour costs.

58
Q

What is frictional unemployment?

A

Time between leaving a job and looking for another job.
Could be time between graduating from university and finding a job.
Rare to get 100% employment, will always be frictional.

59
Q

What is seasonal unemployment?

A

During the summer, more people will be employed in the tourist industry.

60
Q

What is demand deficiency (cyclical unemployment)

A

-Caused by lack of demand for goods and services, usually during recessions.
-Firms are either forced to close or make workers redundant, because their profits are falling due to low consumer spending.

61
Q

Apart from recessions and low spending what else may cause cyclical unemployment?

A

-Caused by increases in productivity, meaning each worker can produce a higher output and therefore fewer workers are needed to produce same quantity of goods and services.

62
Q

How does real wage inflexibility cause unemployment?

A

Wages above market equilibrium may cause unemployment.
-Classical economists argue by letting wages fall to the equilibrium level, there would be no unemployment.
-classical economists would argue by letting wages be flexible, by removing Minimum W, wages could fall and unemployment would be 0.

63
Q

Why is migration significant to markets?

A
  • migrants tent to bring high quality skills to the domestic workforce, which can increase productivity.
    -Migrant labour affects the wages of the lowest paid by bringing them down. This is because migrants come with lower average wages.
    -higher skilled work force is more employable.
64
Q

What is the balance of payments?

A

Record of all the financial transactions made between consumers firms and the government from one country with other countries. States how much is spend on imports, and what the value of exports is.

65
Q

What are exports?

A

Goods and services sold to foreign countries. Are a positive in the balance of payments. INFLOW of money

66
Q

What are imports?

A

Goods and services bought from foreign countries, negative on the balance of payments. OUTFLOW of money.

67
Q

What is the balance of payments made up of?

A
  • the current account
    -The capital account
    -The official financing account.
68
Q

What is the current account on the balance of payments?

A

The balance of trade in goods and services.

69
Q

What is a current account surplus?

A

There is a net inflow of money into the circular flow of income.

70
Q

Why does the UK have a current account deficit?

A

UK spend more on imports from foreign countries, than they earn from exports.
The UK has a surplus with services, but a deficit with goods.

71
Q

What is the UK’s governments macroeconomic objectives?

A
  • full employment
  • low, stable inflation
  • a sustainable current account on the balance of payments.
  • sustainable economic growth.
72
Q

How does exports improve economic growth?

A

By selling more exports, the UK will have a greater flow of money into the circular flow of income. Increase AD and improve economic growth.

73
Q

Why does high economic growth lead to a current account deficit?

A

consumers have higher incomes and so they can spend more on imports, and afford to consumer more.

Economics Theme 2 (6 decks)

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