2.1 - Measures of Economic performance

Question 1

The real rates of change of GDP as a measure of economic growth.

Answer 1

Economic growth is the ​rate of change of output​ - an ​increase in the long-term productive potential of the country ​- an increase in the amount of goods and services that the country produces. It can be measured by % change in real GDP per annum​. It can be shown by a ​shift of the PPF​.

Question 2

What is GDP?

Answer 2

​The standard measure of output, which allows us to compare countries. It is the total value of goods and services produced in a country within a year.

Question 3

What is nominal GDP?

Answer 3

The total value of all goods and services produced in a given time period.

Question 4

What is real GDP?

Answer 4

Nominal GDP that has been adjusted for inflation.

Question 5

What is total GDP?

Answer 5

The overall GDP for a country.

Question 6

What is GDP per capita?

Answer 6

The total GDP divided by the number of people in a country.

Question 7

What is value?

Answer 7

The value of goods/services shows what certain goods/services are worth.

Question 8

What is volume?

Answer 8

The number of goods/services that are produced.

Question 9

What is Gross National Product (GNP)?

Answer 9

An estimate of the total value of all the goods and services produced by a country in a given period, both inside and outside the country’s borders.

Question 10

What is Gross National Income (GNI)?

Answer 10

The total amount of money earned by a nation’s people and businesses, both inside and outside the country’s borders.

Question 11

Making comparisons about growth over time.

Answer 11

Changing national income levels will show us whether the country has grown or shrunk over a period of time.

Question 12

Making comparisons about growth between countries.

Answer 12

A difference in total GDP doesn’t necessarily mean a difference in living standards so 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.

Question 13

What are Purchasing Power Parities (PPP)?

Answer 13

The 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.

Question 14

How are Purchasing Power Parities useful?

Answer 14

● 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, 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 lower cost of living. E.g., in Kenya, £2 a day in their own currency is enough to survive on, whilst it isn’t in the UK​.

Question 15

Problems of using GDP to compare standard of living

Answer 15

● Inaccuracy of data
● Inequalities
● Quality of goods and services
● Comparing different currencies
● Spending

Question 16

How is Inaccuracy of data a problem when using GDP to compare standard of living?

Answer 16

o Some countries are ​inefficient at collecting or calculating data.
o There is a ‘​hidden’ or ‘black’ market in which people work without declaring their income to avoid tax or to continue claiming benefits.
o GDP doesn’t take into account ​home-produced services​, e.g., in many poorer countries people work as farmers where they grow and consume their own crops without trading, and so the GDP is underestimated.
o Errors in calculating the ​inflation rate means real GDP will be slightly inaccurate.
o It’s important to take away ​transfer payments​, when money is paid to a person without any corresponding increase in output in the economy. E.g., 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.

Question 17

How are inequalities a problem when using GDP to compare standard of living?

Answer 17

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.

Question 18

How is the quality of goods and services a problem when using GDP to compare standard of living?

Answer 18

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.

Question 19

How is comparing different currencies a problem when using GDP to compare standard of living?

Answer 19

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.

Question 20

How is spending a problem when using GDP to compare standard of living?

Answer 20

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.

Question 21

UK national wellbeing.

Answer 21

● 2010 - UK PM launched a Measuring National Wellbeing ​report. They found that self-reported health, relationship status and employment status most affect personal well-being.
● 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.

Question 22

What is the relationship between real incomes and subjective happiness?

Answer 22

● 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.
● 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.

Question 23

What is Inflation?

Answer 23

The general increase of prices in the economy which erodes the purchasing power of money. Low inflation is generally considered to be better than high inflation

Question 24

What is Deflation?

Answer 24

The fall of prices and indicates a slowdown in the rate of growth of output in the economy - Negative Inflation.

Question 25

What is Disinflation?

Answer 25

A reduction in the rate of inflation i.e. prices are still rising but they are not rising by as much.

Question 26

What is the Consumer Price Index (CPI) and how is it calculated?

Answer 26

● 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.
● 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.

Question 27

What are the limitations of CPI in measuring the rate of inflation?

Answer 27

● It is impossible for the figure to take into account every single good that is sold in the country.
● Also, different households spend different amount on each good and so therefore CPI is not totally representative.
● It doesn’t include the ​price of housing. 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.

Question 28

What is the Retails Price Index (RPI)?

Answer 28

● 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.

Question 29

(Causes of Inflation) What is Demand Pull?

Answer 29

● When demand increases but supply doesn’t so the prices increase.

Question 30

(Causes of Inflation) What is Cost Push?

Answer 30

● When businesses find their costs have risen, they will put up prices to maintain their profit margins. This can be caused by any factor which decreases AS.

Question 31

(Causes of Inflation) What is Growth of Money Supply?

Answer 31

● Another potential cause of inflation is there being too much money in the economy. If people have access to money they will want to spend it but if there is no increase in the amount of goods and services supplied, then prices will have to rise.
● The government can also increase the amount of money that they print and decisions to increase government borrowing can also increase the money supply.

Question 32

What is the effect of inflation on consumers?

Answer 32

● If people’s incomes do not rise with inflation then they will have ​less to spend​, which could cause a fall in living standards.
● Those who ​are in debt will be able to pay it off at a price which is of cheaper value, but those who are owed money lose because the money they get back is of cheaper value. Consumers who have ​saved ​will lose out as their money is worth less.
● Inflation has ​psychological effects ​on consumers: because prices are rising, they may feel less well-off, even if their income is rising in line with inflation, and so this may cause them to decrease their spending.

Question 33

What is the effect of inflation on firms?

Answer 33

● If inflation in Britain is higher than other countries, British goods will be more expensive. They will become ​less competitive ​and make them more difficult to export.
● Deflation isn’t good as it encourages people to ​postpone their purchases ​as they wait for the price to fall further and they will save more. This can lead to a fall in demand for goods, leading to a fall in firms’ profit.
● Inflation/deflation/disinflation is ​difficult to predict and so this means that firms cannot plan for the future.
● Firms will have to calculate new prices then change their menus, labelling​ etc. and this can be expensive.

Question 34

What is the effect of inflation on the government?

Answer 34

● If the government fails to change excise taxes (taxes at a set amount e.g. £1) in line with inflation then real government revenue will fall. However, if they fail to change personal income tax allowances (the amount a worker can earn tax free) then real government income will increase and taxpayers will have less money.

Question 35

What is the effect of inflation on workers?

Answer 35

● If workers do not receive yearly pay rises of the rate of inflation, they will be worse off and their living standard will decrease. Those in weaker unions tend to be most affected as they are unable to win wage rises in line with inflation.
● Deflation could cause some staff to ​lose their jobs as there is a lack of demand meaning firms see a fall in profit and have to decrease staff to cut costs.

Question 36

What is meant by unemployment?

Answer 36

Adult actively looking for work in the past 4 weeks and are available to start in the next 2 weeks.

Question 37

What is meant by inactive?

Answer 37

When someone does not count as part of the labour force - people of working age who aren’t searching - students, carers, disabled, early retired.

Question 38

What is the labour force?

Answer 38

The total of all active population, both employed and unemployed.

Question 39

How do you calculate the unemployment rate?

Answer 39

(Employed ÷ Labour Force) x 100

• “The number of employed people as a percentage of the labour force.”
• Labour Force = Employed + Unemployed

Question 40

What is the Claimant Count?

Answer 40

The number of people claiming jobseeker’s allowance benefit.

Disadv:
•Unrealistic as not everybody signs on to the benefit.

Question 41

What is the difference between unemployment and under-employment?

Answer 41

Underemployed individuals have jobs, but they may receive fewer hours or lower pay than they want. Unemployed people are without jobs.

Question 42

Causes - What is seasonal unemployment?

Answer 42

Regular seasonal
changes in
employment due to
changes in labour
demand e.g. Tourism,
retail, agriculture

Question 43

Causes - What is structural unemployment?

Answer 43

When changes in the
economy mean that
skills do not match job
opportunities. This is
linked to labour
immobility- how hard
it is to change skills or
move to another area.

Question 44

Causes - What is frictional unemployment?

Answer 44

Transitional unemployment due to people moving between jobs.

Question 45

Causes - What is Demand Efficient / Cyclical unemployment?

Answer 45

When changes in the
economy mean that
skills do not match job
opportunities. This is
linked to labour
immobility- how hard
it is to change skills or
move to another area

Question 46

Causes - What is Real Wage Unemployment?

Answer 46

Real wage unemployment
happens if wages are too high
for the demand and supply
conditions This may happen when
minimum wages are too high
or unions have negotiated
higher wages

Question 47

How has migration and skills affected employment and unemployment?

Answer 47

Migrants are usually of working age, so the supply of labour at all wage rates tends to increase with more migration. There could be more competition to get a job due to the rise in the size of the working population.

Question 48

What are the components of the Balance of Payments?

Answer 48

There are three major parts of a balance of payments: current account, financial account and capital account.

Question 49

What is the Current Account?

Answer 49

The Current Account of the Balance of Payments (BOP) records transactions made between consumers, businesses and the government in one country with other nations.

Question 50

What is the Capital Account?

Answer 50

The capital account of the balance of payments (BOP) records flows of money for investment purposes:

Direct investment in other countries

Banking flows of money

Government debt sold abroad