2.1 - Measures of Economic Performance

Question 1

What is the definition of economic growth

Answer 1

an increase in real GDP, an increase in the real value of goods and services produced in the borders of an economy in a given period of time, usually calculated on an annual or quarterly basis and is given as a growth rate.

Question 2

What is the formula for value and what is the value of national income

Answer 2

Value = volume x current price level
Value of national income is the monetary value of the basket at the prices of the day, the volume is the national income adjusted for inflation and is expressed either as index number or in money terms

Question 3

What is national income

Answer 3

the total value of goods and services produced in an economy over a given time, same as national output (or GDP)

Question 4

What is gross national income (GNI)

Answer 4

GDP + net receipts from abroad + property income + net taxes
Total value of everything produced by a country and the income its residents receive whether it is earned at home or abroad

Question 5

What is purchasing power parity (PPP)

Answer 5

an additional exchange rate adjustment that equalises the price of internationally traded goods across countries

Question 6

What does arbitrage mean

Answer 6

if it is cheaper to buy goods in one country than another, businesses will buy goods in the cheaper country and sell in the other for a profit, this is arbitrage and forces prices and exchange rates to align over time

Question 7

What are benefits of PPP (4)

Answer 7

• Exchange rate remains fairly constant year round so it can be easily compared
• Exchange rates will often get closer to the PPP as time passes
• Knowing the PPP will allow you to track and predict exchange rate relationships
• PPP can help you to examine the relative living conditions of different countries

Question 8

What factors does national happiness take into consideration (5)

Answer 8

Condition of family relationships
Financial security
Job security
Supportive friends
Good health

Question 9

What is the correlation between wealth / income and happiness

Answer 9

Happiness and income are positively related at low incomes but higher levels of income do not associate happiness with increases in income. Depending on the people around us, if you are the richest you will be happier. Income is linked with social status and higher social status makes us happier

Question 10

What is deflation

Answer 10

a persistent decrease in the general price level over a given period of time, prices are going down

Question 11

What is disinflation

Answer 11

a decrease in the rate of increase of prices (inflation falling from 5% to 2%)

Question 12

What is inflation

Answer 12

a persistent increase in the general price level over a given period of time

Question 13

What are the two measurements of inflation

Answer 13

Consumer Price Index (CPI)
Retail Prices Index (RPI)

Question 14

How is RPI different to CPI (3)

Answer 14

Unlike CPI, RPI includes housing costs such as payments on mortgage interest and council tax thus RPI is usually higher
Excludes top 4% of earners and low income pensioners
Doesn’t take into account that higher prices cause switches to cheaper goods

Question 15

What are causes of inflation (3)

Answer 15

Cost-push- rise in costs of production
Growth in money supply
Demand-pull- increases in AD outstrip increases in AS

Question 16

What is the impact of a currency depreciation on exports and imports

Answer 16

the price of imports rises in domestic currency terms, another country’s exchange rate could appreciate which could cause the £ to depreciate

Question 17

What are causes of cost push inflation (7)

Answer 17

National minimum wage increases
Trade union wage increases
Increase in world commodity prices (oil)
External supply-side shocks
Rise in indirect taxes (VAT)
Rise in corporation tax
Falling productivity

Question 18

What are causes of demand pull inflation (6)

Answer 18

Excessively loose fiscal policy
Excessively loos monetary policy- quantitative easing
Exchange rate depreciation
Rising animal spirits (confidence)
Excessive borrowing
Global economy growing quickly

Question 19

What are consequences of inflation on firms

Answer 19

Businesses uncertainty
Falling international competitiveness

Question 20

What are consequences of inflation on the government

Answer 20

Must increase spending on state pension and welfare payments

Question 21

What are consequences of inflation on workers

Answer 21

Real incomes fall- reducing disposable income
Firms face higher costs leading to redundancies

Question 22

What is the wage price spiral

Answer 22

as inflation rises people start to expect higher inflation and this leads to - them asking for higher nominal wage rises to keep pace with the rising cost of goods in shops. Firms may grant this to begin with but as their costs are also rising they may have to pass this on to consumers with higher prices and so they demand higher wages again

Question 23

What are the 2 measures of employment

Answer 23

Claimant Count
International Labour Organisation (ILO)

Question 24

What is the Claimant Count’s measure of insurance

Answer 24

a person who is receiving the Job Seeker’s Allowance

Question 25

What is the International Labour Organisation’s measure of insurance

Answer 25

defines unemployment as someone who has been actively seeking work for the past four weeks but ready and able to start in the next two weeks. It is collected in the UK by the Labour Force Survey

Question 26

Are you employed if you do not get paid e.g. charity workers

Answer 26

Yes

Question 27

What is real-wage inflexibility unemployment

Answer 27

when real wages are too high in a market and they are above the ‘market-clearing’ (equilibrium) wage rate. This is known as Classical unemployment

Question 28

What are causes of real-wage unemployment (3)

Answer 28

High trade union power
High national minimum wages
‘Sticky’ wages (slow to adjust)

Question 29

What impact does unemployment have on the fiscal balance

Answer 29

Higher fiscal deficit as tax revenues fall and welfare payments rise

Question 30

What is the capital account made of

Answer 30

Sale / transfer patents, copyrights, franchises, leases and other transferable contracts, and goodwill
Transfer of ownership of fixed assets

Question 31

What is the current account made of

Answer 31

Trade in goods and services (X-M)
Net primary income- net factor income from abroad (e.g. remittances, profits, interest on dividends)
Net secondary income- net unilateral transfers (e.g. foreign aid)

Question 32

What is the financial account made of

Answer 32

Net foreign ownership of domestic assets
Hot money flow

Question 33

How does trade make economies interconnected

Answer 33

if the USA is running a current account deficit, to fund this deficit it has to have a capital account surplus. It does this by selling US government debt (called treasuries) to foreign governments and international private investors. If international investors and international governments no longer wanted to buy US government debt, then the US would have to balance its current account. International trade allows current account surpluses and deficits to develop

Question 34

What are the components of GDP

Answer 34

GDP = C+I+G+(X-M)
Consumption
Investment
Government spending
Exports
Imports

Question 35

What does a current account deficit mean for inflation

Answer 35

a current account deficit may show that a nation is importing lots of goods and services, however if labour and input costs are cheaper overseas, they may reduce inflationary pressure. If the price of goods made in China is a lot lower than the price of goods made in the UK, then a current account deficit could reduce inflationary pressure