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economics > 2.1 Measures of Economic Performance > Flashcards

2.1 Measures of Economic Performance Flashcards

Theme 2

1
Q

What is economic growth?

A

Increase in an economy’s potential output or the real value of goods produced.
Measured by % change in real GDP.

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2
Q

What is Gross Domestic Product (GDP)?

A

Measures the value of the real output of the economy over a period of time; a rise in GDP indicates economic growth.

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3
Q

What is Nominal GDP?

A

The monetary value of all goods produced in the economy (GDP at current prices).

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4
Q

What is Real GDP?

A

Nominal value of GDP adjusted for inflation (GDP at constant prices).

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5
Q

What is Real GDP per capita?

A

National income per person often used to measure standard of living.

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6
Q

What is Gross National Product (GNP)?

A

GDP + Net property income from abroad.

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7
Q

What is Gross National Income (GNI)?

A

GDP + Net income from abroad of compensation of employees and property income.

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8
Q

What is the difference between value and volume?

A

Value shows what goods are worth.

Volume shows the number of goods produced.

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9
Q

What is Purchasing Power Parity (PPP)?

A

Used when assessing relative living standards between countries.
Calculated by comparing the price of a basket of comparable goods in different countries.
Measures the total amount of goods that a single unit of a country’s currency can buy in another country.

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10
Q

What are the limitations of GDP in comparing living standards?

A

Distribution of income
Environmental degradation
Hidden market
Negative externalities of consumption
Impact of technological improvements

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11
Q

What is subjective happiness?

A

‘Self-imported’ levels of happiness with one’s life, determined using questionnaires.

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12
Q

What is the Easterlin Paradox?

A

Life satisfaction rises with average income, but only up to a point.
Diminishing marginal gain in happiness.

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13
Q

What is the Human Development Index (HDI)?

A

Indicator of economic development and a broader measure of standard of living.

  • Life expectancy at birth.
  • Mean years of schooling.
  • GNI per capita.

ADV - Better measure
DISADV - Does not consider all aspects.

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14
Q

What is inflation?

A

Sustained increase in the general price level.

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15
Q

What is deflation?

A

Sustained decrease in the general price level.

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16
Q

What is disinflation?

A

Reduction in the rate of inflation.

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17
Q

What is Consumer Price Index (CPI)?

A

Tracks change in the price of a basket of goods purchased by an average household. Expressed as an index number.

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18
Q

What is the equation for CPI Inflation Rate?

A

(Current CPI / Previous CPI) x 100

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19
Q

What are limitations of CPI as an inflation measure?

A

Only calculated for an ‘average’ family
Does not consider the quality of goods
Needs regular updating
Inaccurate international comparisons if not calculated in the same way

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20
Q

What is Retail Price Index (RPI)?

A

Includes items not in CPI such as council tax.
Often used to calculate increases in pension, welfare benefits, etc.
In a period of rising interest rates RPI > CPI.

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21
Q

What is Demand Pull inflation?

A

When demand for goods exceeds available supply. Caused by excess AD in the economy.

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22
Q

What is Cost-Push Inflation?

A

Caused by an increase in the cost of production. Can cause stagflation.

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23
Q

What is stagflation?

A

When the economy stagnates as the price level rises.

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24
Q

What are the causes of inflation?

A

Demand-pull

Cost-push

Growth of the money supply as it can increase AD or increase costs of production.

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25
Q

What is the claimant count?

A

The count totals the number of recipients of job seeker’s allowance added to those looking for work to claim universal credit.

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26
Q

What is the International Labour Organisation’s classification of unemployed?

A
  • Not employed for a week.
  • Available to take a job within two weeks.
  • Actively seeking a job in the last 4 weeks.
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27
Q

What is the labour force survey?

A

Asks 60 - 70,000 UK households to self-classifies being employed, unemployed or economically inactive.

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28
Q

What is the definition of unemployed?

A

Someone of working age, willing and able to work and actively seeking work but cannot find a job.

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29
Q

What is underemployment?

A

When individuals are employed but their employment is insufficient in terms of hours worked, skill utilisation, or income to fully meet economic needs or potential.

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30
Q

What is the equation for the unemployment rate?

A

(No. Unemployed / total labour force) x 100

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31
Q

What is the equation for the employment rate?

A

(No. Employed / population of working age) x 100

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32
Q

What is the equation for the labour force participation rate?

A

(Labour force / total population) x 100

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33
Q

What is the equation for the inactivity rate?

A

(Inactive people of working age / working age population) x 100

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34
Q

What is structural unemployment?

A

A mismatch between jobs and skills in the economy usually due to the structure of the economy changing.

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35
Q

What is frictional unemployment?

A

When workers are in between jobs. Short-term unemployment.

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36
Q

What is seasonal unemployment?

A

Occurs as certain seasons come to an end and labour is not required until the next season.

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37
Q

What is real wage unemployment?

A

When wages are inflexible at a point higher than the free-market equilibrium wage.

Minimum wage laws increase wages, creating an excess supply of labour.

The excess supply represents real wage unemployment.

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38
Q

How does unemployment affect governments?

A

-Increased spending on benefits.
- Less tax revenue.
- Increased spending on retraining.

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39
Q

How does unemployment affect firms?

A

-Loss of sales revenue.
- Loss of output / production.
- Changes the skill level in the economy.

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40
Q

How does unemployment affect individuals?

A

-Loss of income.
- Mental health issues.

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41
Q

How does unemployment affect society?

A

-Increase in crime.
-Increased homelessness.

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42
Q

What is aggregate demand?

A

Total demand for all goods in an economy at any given average price level.

43
Q

What is investment?

A

Total spending on capital goods by firms.

44
Q

What is the equation for AD?

A

AD = C + I + G + (X - M)

45
Q

What does an increase in AD represent?

A

Economic growth.

46
Q

What causes a movement along the AD curve?

A

Change in the average price level.

47
Q

What causes a shift in the AD curve?

A

Change in AD.

48
Q

What is disposable income?

A

Money households have leftover from wages after taxes are paid.

49
Q

What is the household savings ratio?

A

Calculates the proportion of the household income that is saved.

50
Q

What happens to savings during a boom?

A

Decrease.

51
Q

What happens to saving when interest rates rise?

A

Greater incentive to save.

52
Q

What is gross investment?

A

Total amount of spending on capital goods.

53
Q

What is net investment?

A

Gross investment - depreciation.

54
Q

What is depreciation?

A

Decrease in monetary value of a capital good over time.

55
Q

What is the significance of investment?

A

Links to profit maximisation.

Helps to increase productive capacity and increase economic growth.

56
Q

What are the influences of investment?

A

Rate of economic growth - signals output.

Business expectations and confidence.

Keynes and ‘animal spirits’ - believed firms exhibit too much optimism in good times and take too many risks.
Run with the mood of the economy and make less rational investment decisions.

Demand for exports - The exchange rate depreciates, and goods seem cheaper to foreigners.

Interest rates - most investments are financed through loans.

Influences of government and regulations - intervention and regulation.

57
Q

What is fiscal policy?

A

Use of government spending and taxation to influence the economy.

58
Q

What influences government expenditure?

A

Trade/business cycle
During a boom; unemployment decreases, decreasing benefit payments.
Tax revenues increase and can be used to pay back government debt or increase spending on goods.

Fiscal policy.

59
Q

What influences net trade?

A

Uk real income - increase, increases M, Trade balance weakens.

Real income abroad - increase, increases X, Trade balance strengthens.

UK £ appreciates - X decreases as more expensive for foreigners.
M increases, Trade balance weakens.

World economy booms - X increases, Trade balance strengthens.

Protectionism - Increases, M decreases as more expensive, Trade balance strengthens.

Non-price factors; quality - higher quality, more price inelastic.
Innovations - goods aren’t sold anywhere else.

60
Q

What is protectionism?

A

Shielding the country’s domestic industries from foreign compensation by taxing imports.

61
Q

What is aggregate supply?

A

Total supply of goods produced within an economy at a specific price level, at a given time.

62
Q

What causes movement along an AS curve?

A

Change in the average price level.

63
Q

What causes a shift in SRAS?

A

Change in cost of production or productivity.

64
Q

What causes a shift in LRAS?

A

Change in productive capacity through a change in quality or quantity of factors of production.

65
Q

What causes long-term growth?

A

Increase in productive capacity.

66
Q

What factors influence SRAS?

A

Change in cost of raw materials and energy.

Change in exchange rate.

Change in tax rates.

67
Q

What do classical economists believe in relation to LRAS?

A

In the long-run, an economy will return to full employment level of output.

68
Q

What is the Keynesian belief in relation to LRAS?

A

It’s the role of the government to increase expenditure to shift demand and change negative ‘animal spirits’.

The economy can be in long run equilibrium at any level of output.

Increase in LRAS would not impact an economy stuck in depression, as it requires an increase in AD to change national output.

69
Q

What are animal spirits?

A

Represent emotions of confidence and hope which can affect financial decision making which can fuel or hamper economic growth.

70
Q

What factors influence LRAS?

A

Technological advances.

Changes in relative productivity.

Change in education and skills.

Change in government regulations.

Demographic changes and migration.

Competition policy.

71
Q

What is the circular flow of income?

A

Illustrates money flows in an economy.

72
Q

What is income?

A

The flow of money in an economy.

73
Q

What is wealth?

A

Stock of assets that can be used to generate income.

74
Q

What is national income?

A

Value of the output of an economy over a period of time.
Calculated using income/expenditure approach.

75
Q

What do households supply to firms?

A

Land, Labour and Capital (Factors of Production)

Expenditure on goods and services.

76
Q

What do firms supply to households?

A

Goods and services.

Rent, Wages, Interest and Profit.

77
Q

What are injections?

A

Add money into the circular flow of income, through:

-Increased government spending.
-Increased investment.
-Increased exports.

78
Q

What are withdrawals/leakages?

A

Remove money from the circular flow of income, through:

-Increased saving by households.
-Increased taxation by the government.
Increased imports.

79
Q

What is the real national output equilibrium?

A

AD intersects AS.

80
Q

What is the multiplier ratio?

A

Ratio of change in real income to the injection that created the change.

81
Q

What is the multiplier process?

A

Based on the idea that one individuals spending is another individual’s income.

C increased, increasing AD - Shift right.

Store owners benefit from the extra income, spending it on goods.

The expenditure is now income for the next tier.

Therefore the final increase in national income is much larger than the initial injection.

82
Q

What is MPC, MPS, MPT and MPM?

A

Proportion of additional income that is spent, saved, paid in tax or spent on imports.

83
Q

How do you calculate MPC, MPS, MPT and MPM?

A

Change in C / Change in Y

Change in S / Change in Y

Change in T / Change in Y

Change in M / Change in Y

84
Q

What are the two ways of calculating the multiplier effect?

A

Focussing on MPC:
1 / (1 - MPC)

Focussing on withdrawals:
1 / MPW = 1 / (MPM + MPS + MPT)

85
Q

How do you calculate the impact on GDP in relation to the multiplier effect?

A

Injection x Multiplier

86
Q

Evaluation of the multiplier effect?

A

Size of multiplier is dependent on the size of leakages; higher leakages, smaller multiplier.

Greater MPC, greater multiplier.

Used to judge economic growth cause by an increase in spending.

Time lag to work through the economy - can take up to 18 months.
Change in consumer confidence during that time will impact final outcome.

87
Q

What is actual growth?

A

Increase in quantity of goods produced.
Measured by % change in real GDP.

88
Q

What is potential growth?

A

Increase in productive potential.

89
Q

What causes short run growth?

A

Change in AD components.

90
Q

What causes long term growth?

A

Improvement in quantity and quality of factors of production.

91
Q

What is Export - led growth?

A

Growth that occurs as a result of an increase in the sale of goods to foreign countries.

Value of exports rise, GDP rises.

92
Q

What is a positive output gap?

A

Real GDP > Potential Real GDP

93
Q

What is a negative output gap?

A

Real GDP < Potential Real GDP

Spare capacity.

94
Q

What is Long term trend growth?

A

Constant increase in productive capacity.
Reduces impact of outliers in the data.

95
Q

What is the classical view of a positive output gap?

A

Return to Y fe but at higher PL.
Not sustainable.

96
Q

What is the classical view of a negative output gap?

A

Return to Y fe in long run but at a lower PL.

97
Q

Why is it difficult to measure output gaps?

A

Hard to know exactly what the maximum productive potential of a country is.

Rapid riding prices suggest positive output gap developing.

Rising unemployment and slowdown of growth suggest a negative gap is increasing.

98
Q

What is the trade (business) cycle?

A

Change in real GDP (actual growth) over time. Will fluctuate above and below long term trend rate of growth.

99
Q

What are the characteristics of a boom?

A

High rates of economic growth.

Decreased unemployment, increased job vacancies.

Decrease in negative output, spare capacity reduced.

Increase confidence, more risky decisions taken.

Increase rate of inflation - demand pull.

Improvement in government budget as tax revenue rises.

100
Q

What are the characteristics of a recession?

A

6 consecutive months of negative economic growth.

Increase unemployment.

Increase negative output gap and spare productive capacity.

Low confidence.

Low inflation.

Increase government expenditure leading to great budget deficit.

100
Q

What are the benefits of economic growth?

A

Increase in incomes, better standard of living.

Decrease levels of absolute poverty.

Improvement in quantity/quality of green technology.

Higher sales revenue, greater profits.

Increased investment, increase in potential output.

Higher government tax revenue, due to rising incomes and profits.

Reduced expenditure by governments of benefits.

Increased employment.

101
Q

What are the costs of economic growth?

A

Increase in AD, Demand pull inflation, purchasing power decreases.

Lack of equity in distribution of income.

Environmental damage cause by negative externalities of production.

Increased inflation harms export sales.

Decreased export sales may delay investment.

Increased income, greater consumption of demerit goods.

Greater output, more time from workers, decreased well being and free time.

102
Q
A

economics (4 decks)

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