2.1 - Measures of economic performance

Question 1

Economic growth

Answer 1

Rise in the value of GDP (National output)

Question 2

What does the rate of change of real GDP measure?

Answer 2

The percentage increase in a country’s output adjusted for inflation – a measure of economic growth.

Question 3

Real GDP

Answer 3

Value of GDP adjusted for inflation.

Question 4

Nominal GDP

Answer 4

Value of GDP without being adjusted for inflation.

Question 5

Total GDP

Answer 5

Combined monetary value of all goods and services produced within a country’s borders during a specific time period

Question 6

GDP per capita

Answer 6

GDP divided by the population

Question 7

Volume of GDP

Answer 7

GDP adjusted for inflation. Size of the basket of goods and the real level of GDP.

Question 8

Value of GDP

Answer 8

Monetary value of GDP at prices of the day. Volume times current price level.

Question 9

Gross national Income (GNI)

Answer 9

GDP plus net income from abroad
GDP + (X-M)

Question 10

Gross national product (GNP)

Answer 10

The total value of all goods and services made by a country’s people and businesses over a set period

Question 11

2 ways national income can be measured?

Answer 11

*Gross national product
*Gross national income

Question 12

Why compare GDP growth rates between countries and over time?

Answer 12

To assess relative economic performance and development progress.

Question 13

Purchasing Power Parity

Answer 13

Exchange rates that equalise the price of a basket of goods across countries – used for more accurate comparisons.

Question 14

What are the limitations of using GDP to compare living standards?

Answer 14

*Ignores income distribution
*Doesn’t account for informal economy
*Excludes non-market transactions
*Ignores environmental factors
*May not reflect happiness or well-being

Question 15

What is national well-being (UK)?

Answer 15

A measure that includes health, education, environment, life satisfaction

Question 16

What is the relationship between income and happiness?

Answer 16

Generally positive, but with diminishing returns – more income boosts happiness up to a point.

Question 17

Inflation

Answer 17

A sustained increase in the general price level of goods and services in an economy over time.

Question 18

Deflation

Answer 18

A sustained fall in the general price level.

Question 19

Disinflation

Answer 19

A fall in the rate of inflation (prices are still rising, just more slowly).

Question 20

How is inflation calculated?

Answer 20

Consumer Price Index (CPI)

Question 21

How is the CPI calculated?

Answer 21

By weighting the prices of items based on average household spending and tracking percentage price changes over time.

Question 22

What are the limitations of CPI?

Answer 22

*Doesn’t include housing costs
*May not reflect personal inflation
*Substitution bias (people change buying habits)
*Time lag in updating the basket

Question 23

Retail Prices Index (RPI)?

Answer 23

An alternative measure of inflation that includes housing costs (like mortgage interest), often higher than CPI.

Question 24

2 measures of inflation

Answer 24

*CPI
*RPI

Question 25

What are the main causes of inflation?

Answer 25

* Demand-pull inflation: excessive aggregate demand * Cost-push inflation: rising input costs (e.g., wages, oil) * Growth of the money supply: too much money chasing too few goods

Question 26

What are the effects of inflation on consumers?

Answer 26

* Reduces purchasing power * Hurts savers * Can reduce real income

Question 27

What are the effects of inflation on firms?

Answer 27

* Increases costs * Creates uncertainty * May reduce international competitiveness

Question 28

What are the effects of inflation on government?

Answer 28

* Increases tax revenues via fiscal drag * Increases spending on index-linked benefits * May damage credibility if inflation is above target

Question 29

What are the effects of inflation on workers?

Answer 29

* Reduces real wages if pay doesn’t keep up * Can lead to wage-price spirals if workers demand higher pay

Question 30

Hyperinflation

Answer 30

When prices rise extremely quickly, and money rapidly loses its value.

Question 31

Unemployment

Answer 31

People without work but actively seeking it.

Question 32

Underemployment

Answer 32

People working below their skill level or working part-time but wanting full-time work.

Question 33

How is unemployment measured?

Answer 33

* ILO/Labour Force Survey * Claimant Count

Question 34

What is the Claimant Count measure of unemployment?

Answer 34

It counts people claiming unemployment-related benefits (e.g., Jobseeker’s Allowance) in the UK.

Question 35

What is the ILO/UK Labour Force Survey measure?

Answer 35

A survey-based measure defining unemployment as people without a job who are actively seeking work and available to start.

Question 36

Why are changes in the employment rate significant?

Answer 36

Higher employment often indicates economic growth, better living standards, and more tax revenue.

Question 37

What does a rise in the unemployment rate suggest?

Answer 37

Possible economic slowdown, lower income, and higher welfare costs.

Question 38

What does the inactivity rate measure?

Answer 38

The proportion of working-age people not actively seeking work (e.g., students, carers, early retirees).

Question 39

Structural unemployment

Answer 39

Long-term unemployment caused by shifts in the economy (e.g., decline in manufacturing, automation).

Question 40

Frictional unemployment

Answer 40

Short-term unemployment as people move between jobs.

Question 41

Seasonal unemployment

Answer 41

Unemployment due to seasonal work patterns (e.g., tourism, agriculture).

Question 42

Cyclical/demand-deficient unemployment

Answer 42

Caused by a fall in aggregate demand during a recession.

Question 43

Real wage inflexibility unemployment

Answer 43

When wages are too high (e.g. due to minimum wage laws or trade unions), reducing demand for labour.

Question 44

How does migration impact employment and unemployment?

Answer 44

Can increase labour supply and fill skill shortages but may increase competition for jobs.

Question 45

What are the effects of unemployment on consumers?

Answer 45

* Lower income * Reduced spending * Lower living standards.

Question 46

What are the effects of unemployment on firms?

Answer 46

* Reduced demand for goods/services * Larger pool of labour to hire from.

Question 47

What are the effects of unemployment on workers?

Answer 47

* Loss of income * Skills * Morale

Question 48

What are the effects of unemployment on the government?

Answer 48

* Lower tax revenue * Higher welfare spending * A potential budget deficit

Question 49

What are the effects of unemployment on society?

Answer 49

* Increased inequality * Social problems * Reduced economic potential

Question 50

What is the balance of payments made up of?

Answer 50

* Current account – trade in goods/services, income, and transfers * Capital account * Financial account

Question 51

What does the current account include?

Answer 51

* Trade in goods (visible trade) * Trade in services (invisible trade) * Primary income (e.g., dividends, interest) * Secondary income (e.g., foreign aid, remittances)

Question 52

Current account deficit

Answer 52

When imports of goods/services exceed exports.

Question 53

Current account surplus

Answer 53

When exports of goods/services exceed imports.

Question 54

What macroeconomic effects can a current account deficit have?

Answer 54

* Weaker currency * Possible loss of confidence * Increased borrowing from abroad

Question 55

How does a current account imbalance affect other macro objectives?

Answer 55

It may lead to trade-offs with growth, inflation, and employment. E.g., correcting a deficit might reduce demand and cause unemployment.

Question 56

Interconnectedness of economies

Answer 56

Countries are linked through trade, investment, and financial flows—shocks in one country can affect others globally.

Question 57

The UK has a current account…

Answer 57

deficit