2.1 Measures of economic performance

Question 1

What is the definition of GDP?

Answer 1

The value of all goods/services produced in an economy in a one-year period

Question 2

What is the definition of nominal GDP?

Answer 2

The actual value of all goods/services produced in an economy in a one-year period - not taking inflation into account

The word nominal refers to the fact that the metric has not been adjusted for inflation
If an exam question quotes the GDP data ‘at current prices’ it is referring to nominal GDP

Question 3

What is the definition of real GDP?

Answer 3

The value of all goods/services produced in an economy in a one-year period - including inflation

For example, if nominal GDP is £100bn and inflation is 10% then real GDP is £90bn
When an exam question uses the phrase ‘at constant prices’ it is referring to real GDP

Question 4

What is GDP per capita?

Answer 4

It shows the mean wealth of each citizen in a country

GDP / Population

Question 5

What is GNI?

Answer 5

Gross national income (GNI) measures the income earned by citizens operating outside of the country + the GDP

Question 7

What is a PPP (Purchasing power paritys)?

Answer 7

It calculates the relative purchasing power of different currencies

Question 8

What are limitations of using GDP to compare living standards?

Answer 8

• Lack of information provided on inequality
• Quality of goods and services
• Does not include voluntary work
• Differences in hours worked
• Environmental factors

Question 9

How does lack of information provided on inequality limit GDP?

Answer 9

• The distribution of income in an economy is provided as an average (GDP/capita)
• The differences in the standard of living within the same country can be significant

Question 10

How does quality of goods and services limit GDP?

Answer 10

• GDP provides no information on the increase/decrease in the quality of goods/services over time
• If quality worsens but prices are lower, then the standard of living is judged to have increased
• The poor quality may actually have decreased the standard of living

Question 11

How does voluntary work limit GDP?

Answer 11

• If it included voluntary/unpaid work, then GDP/capita would be higher
• E.g. some economies have a high amount of family child care provision. This increases standards of living but is not recorded in any way

Question 12

How does the difference in hours worked limit GDP?

Answer 12

• GDP data does not capture the amount of time taken to produce the GDP/capita
• In one country, where it takes less time to generate the income than in a similar country, the standard of living would actually be higher

Question 13

How do environmental factors limit GDP?

Answer 13

• GDP does not capture the environmental and health impacts of generating the income within a country (externalities)
• In one country, where there are fewer externalities in generating the income, the standard of living would be higher

Question 14

Who measures national happiness and societal well-being in the UK?

Answer 14

Office for National Statistics (ONS)