2.1 Measures of Economic Performance

Question 1

what is the definition of gross domestic product (GDP)

Answer 1

the value of all G/S produced in an economy in a one-year period

Question 2

what are the three ways to measure national output/GDP

Answer 2

expenditure method - C+I+G+(X-M)
income method - rewards for FOPs
output method - value G/S produced

Question 3

what are the different types of GDP

Answer 3

nominal
real
per capita

Question 4

what is nominal GDP

Answer 4

not adjusted for inflation

Question 5

what is real GDP

Answer 5

adjusted for inflation

Question 6

what is GDP per capita

Answer 6

per person ( / population)

Question 7

what is gross national product (GNP)

Answer 7

GDP + income from abroad - income sent by non-residents to their home countries

Question 8

what is gross national income (GNI)

Answer 8

GDP + income earned by citizens operating outside the country

Question 9

what is purchasing power parity (PPP)

Answer 9

a conversion factor that can be applied to GDP, GNI and GNP that calculates the relative purchasing power of different countries (how much a basket of goods costs in different countries)

Question 10

what is green GDP

Answer 10

GDP minus environmental cost

Question 11

how does a lack of inequality information limit the effectiveness of using GDP as a measure of living standards

Answer 11

distribution of income is only taken as an average, so lacks detail about equality

Question 12

how does not including the quality of G/S limit the effectiveness of using GDP as a measure of living standards

Answer 12

no information of the increase/decrease in the quality of G/S over time, which can dictate the standard of living

Question 13

how does not including informal activity limit the effectiveness of using GDP as a measure of living standards

Answer 13

things such as black markets, DIY, subsistence farming and volunteering/unpaid work are not included in the GDP figure

Question 14

how does double counting limit the effectiveness of using GDP as a measure of living standards

Answer 14

values of G/S may be counted in the primary and secondary sector

Question 15

how does not including negative externalities limit the effectiveness of using GDP as a measure of living standards

Answer 15

things such as environmental or pollution costs are not included

Question 16

how does not including FDIs limit the effectiveness of using GDP as a measure of living standards

Answer 16

foreign direct investment will increase GDP, but the profit may be sent to a different country

Question 17

how does not including income earned abroad limit the effectiveness of using GDP as a measure of living standards

Answer 17

income earned abroad may be sent to a different country

Question 18

what are the limitations with using GDP for comparing living standards between countries

Answer 18

lack of inequality information
quality of G/S not included
does not include informal activity
double counting may occur
negative externalities not included
influence of FDI and repatriation profit
factor income earned abroad

Question 19

what is the human development index (HDI)

Answer 19

income - GDP per capita at PPP
health - life expectancy
education - mean years at school

Question 20

how does the scale of the HDI work

Answer 20

the closer to 1, the higher the level of economic development and standard of living

Question 21

what does the Easterlin paradox describe

Answer 21

happiness and increases in income have a direct relationship to a point, but beyond that point the relationship is less evident

Question 22

what is the definition of inflation

Answer 22

an increase in the general level of prices - the average price of all G/S increases. implies that the value of money falls since more money is now needed to buy the same things

Question 23

what is the definition of disinflation

Answer 23

when the rate of inflation falls, but does not become negative. prices are still rising but at a slower rate

Question 24

what is the definition of deflation

Answer 24

when the rate of inflation becomes negative. the average price levels fall, and the value of money increases

Question 25

what is accelerating inflation

Answer 25

where the rate of inflation increases

Question 26

what is hyper-inflation

Answer 26

where the rate of inflation becomes so high that it leads to the break-down of the currency

Question 27

what is the consumer prices index (CPI)

Answer 27

the measure of inflation targeted by the BofE. used as a benchmark that any index-linked payments are increased off of. does not include housing costs

Question 28

what are the limitations of using the CPI

Answer 28

gives inflation for the ONS' average basket, which may not be reflective for everyone it is one of several methods used to measure inflation, as well as RPI and others does not capture quality of products only measured on an annual basis prone to errors in data collection

Question 29

what is the retail prices index (RPI)

Answer 29

a measure of inflation that does not include housing costs, council tax, mortgage interest payments, house depreciation and other house purchasing fees

Question 30

what does the ONS use to determine an accurate measurement of inflation

Answer 30

the basket of goods

Question 31

what are the main causes of inflation

Answer 31

demand-pull cost-push

Question 32

what causes cost-push inflation

Answer 32

rising costs of factors of production producers pass on higher costs to consumers AS curve shifts to the left

Question 33

how does cost-push inflation manifest itself

Answer 33

rise in wages (without rise in productivity) rise in the cost of imported raw materials rise in indirect taxes

Question 34

what does cost-push inflation look like on a diagram

Answer 34

left shift of (SR)AS curve

Question 35

what policies can be used to address cost-push inflation

Answer 35

restrictions in wage increases (especially public sector) reduction in corporation tax subsidies + other supply side policies

Question 36

what causes demand-pull inflation

Answer 36

excessive growth in AD compared to AS shifts AD curve to the right allows sellers to raise prices

Question 37

how does demand-pull inflation manifest itself

Answer 37

high consumer spending or high demand for exports money supply growing faster than output bottleneck shortages since supply can't meet demand

Question 38

what does demand-pull inflation look like on a diagram

Answer 38

right shift of AD curve

Question 39

what fiscal policies can be used to address demand-pull inflation

Answer 39

reducing government spending on public goods or welfare raise direct taxes to reduce disposable income

Question 40

what monetary policies can be used to address demand-pull inflation

Answer 40

higher interest rates to reduce C and I higher interest rates also cause exchange rate to appreciate, which decreases (X-M) and thus AD

Question 41

what are the negative effects of inflation on consumers

Answer 41

decrease in purchasing power (especially for those on low/fixed incomes) decrease in the real value of savings 'shoe leather' costs - finding up-to-date price information

Question 42

what are the negative effects of inflation on firms

Answer 42

uncertainty due to rapid price changes 'menu change' costs - forces firms to change their prices

Question 43

what are the negative effects of inflation on the government

Answer 43

erodes international competitiveness of exports trade-offs in tackling inflation (e.g. unemployment or reduced economic growth)

Question 44

what are the negative effects of inflation on workers

Answer 44

wage price spirals - inflationary pay rises give illusion of real pay rise, increase in AD, more inflation etc. wage increases less than inflation can reduce motivation fiscal drag - inflationary pay rises can move workers to higher tax brackets

Question 45

what are the positive effects of inflation on consumers

Answer 45

increase the real value of borrowing (money to be paid back is worth more in real terms)

Question 46

what are the positive effects of inflation on firms

Answer 46

increase in output in line with increased demand

Question 47

what are the positive effects of inflation on the government

Answer 47

keeps unemployment low in a recession with higher levels of AD can improve government finances with fiscal drag

Question 48

what are the positive effects of inflation on workers

Answer 48

can get higher wages since it is easier to negotiate a pay rise

Question 49

what is the evaluation of the effects of inflation

Answer 49

rate of inflation causes of inflation duration anticipated vs unanticipated rate of change / stability of prices