2.1 (measures of economic performance)

Question 1

GDP

Answer 1

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

Question 2

what two ways can GDP be measured

Answer 2

Expenditure approach = adds up value of all expenditure in economy (CIGX-M)

Income approach = adds up rewards for the factors of production used (wages from labour, rent from land, interest from capital, profit from entrepreneurship)

Question 3

Value vs volume of GDP

Answer 3

Value is the monetary worth
Volume is the physical number

Question 4

Nominal

Answer 4

the metric has NOT been adjusted for inflation

Question 5

Real GDP

Answer 5

value adjusted for inflation

Question 6

Constant prices and current prices referring to

Answer 6

‘at constant’ refers to real GDP
‘at current’ refers to nominal GDP

Question 7

GNI compared with GDP

Answer 7

GDP measures value of production within country’s borders, not considering income earned by citizens operating outside country

Question 8

Is GNI or GDP a more realistic view of a country’s wealth

Answer 8

GNI/Capita
gives a more people focused and accurate picture of nations actual economic welfare, showing what residents actually earn and control, not just what is produced within country.

Question 9

What is Purchasing Power Parities?

Answer 9

a conversion factor applied to GDP, GNI and GNP, calculating purchasing power of currencies.

Question 10

How does PPP work

Answer 10

shows the number of units of a countrys currency that are required to buy the same basket of goods in local economy, as 1$ would buy of same products in USA

Question 11

Limitation of PPP

Answer 11

Countries have different tastes and preferences, so choosing items to use in basket is difficult

Question 12

Limitations of GDP for comparisons

Answer 12

• Information Deficit for inequality
• Quality of goods/services
• Does not include unpaid/voluntary work that increases standard of living
• Differences in hours worked
  -Environmental factors

Question 13

consumer prices index

Answer 13

measures average change in prices of basket of goods and services typically bought by households.
Used to track inflation and compare cost of living over time.

Question 14

Deflation vs Disinflation

Answer 14

Deflation = fall in average price level
Disinflation = average price level rising at lower rate than before

Question 15

How are the goods in a basket weighted

Answer 15

based on the proportion of household spending
(price X weighting determines final value of good in basket)

Question 16

Limitations of CPI

Answer 16

• Ignores regional differences in level of inflation
• it is one of several methods used by countries (e.g. Retail price index) making comparisons between countries less meaningful if different methods are used
• Quality of good not captured
• Only measures changes in consumption on an annual basis, and not more frequently
• Prone to errors in data collection

Question 17

Retail Prices Index (RPI)

Answer 17

calculated in same way as CPI, but including housing costs such as mortgage payments and house depreciation

Question 18

Demand-Pull inflation (and its links)

Answer 18

• Caused by excess demand in the economy
• Often linked to strong economic growth, low unemployment, and increased consumer spending

Question 19

Cost-Push Inflation (and its links)

Answer 19

• Caused by increases in costs of production in an economy
• Often linked to supply shocks, rising Oil prices, a weaker currency and wage increases.

Question 20

Wage-Price spiral

Answer 20

• Increased AD causes demand pull inflation
• Workers now feel less well off as their wages no longer have the same purchasing power
• Workers may demand wage increases to compensate for higher prices
• Those wage increases are a form of cost push inflation, driving prices even higher.
• This is a wage-price spiral.

Question 21

Non-labour force

Answer 21

all those that are not seeking work, and Economically inactive are those between 16-65.

Question 22

Differences between ILO measure (labour force survey) and the Claimant Count in measuring UK unemployment

Answer 22

• ILO based on survey, Claimant count based on number of people claiming unemployment related benefits
• ILO measures people actively seeking and available for work, including students
• Claimant Count misses those who are unemployed but not claiming/eligible for benefits
• ILO is broader and internationally comparable

Question 23

Underployment

Answer 23

someone who is:
- working but want to work more hours
- working in a lower skill job

Question 24

What is Underemployment often a response of

Answer 24

• Cyclical unemployment (fall in AD causes firms to lay off workers)
• Structural unemployment (mismatch between skills and available jobs as structure of economy changes)

Question 25

significance of Migration on employment and unemployment

Answer 25

Positive: - fill labour shortages (especially low skilled and seasonal jobs) - Increase demand - increased supply of labour pushes down wages, an incentive to hire more and increase employment Negative: - Increase competition for low skilled jobs in short term - put downward pressure on wages in certain sectors - Public perception of job displacement can increase political tensions

Question 26

Effects of unemployment on Gov

Answer 26

- Higher welfare spending - Lower tax revenue - Worsens budget deficit

Question 27

Effects of unemployment on Firms

Answer 27

- larger pool of available labour, possibly lower wage demands - reduced demand = lower sales - underutilisation of capital

Question 28

Effects of unemployment on Economy

Answer 28

- Lower GDP and economic growth - Crime - Potential loss of skills (hysteresis) if long term

Question 29

Effects of unemployment on individuals

Answer 29

- Loss of income, reduced standard of living - Health issues and stress

Question 30

What is the BoP and its two main sections

Answer 30

- record of all the financial transactions between a country and the rest of the world - current account (goods/services transactions) -financial and capital account (transactions related to savings, investment and currency stabilisation)

Question 31

Current account in BoP

Answer 31

- considered most important account - records net income that an economy gains from international transactions - goods = visible e/i - services = invisible e/i - often expressed as a % of GDP allowing for easy international comparisons

Question 32

example of how to correct a current account deficit

Answer 32

- gov can raise *tariffs* - likely decreasing imports brought by households - firms that rely on imports for raw materials now face higher costs of production - higher costs are likely to be passed onto consumers as higher prices - reducing the current account has come at the expense of increased inflation in economy; there has been a *trade-off*

Question 33

Primary and secondary income in current account

Answer 33

Primary income = earnings from investments abroad minus payments made to foreign investors Secondary income = transfers like foreign aid, remittances, and pensions