2.1 Measures of Economic Performance

Question 1

What is economic growth?

Answer 1

Economic growth is the increase in the real gross domestic product (real GDP) over time.

Question 2

What is the difference between nominal and real GDP?

Answer 2

Nominal GDP is measured at current prices (includes inflation).

Real GDP is adjusted for inflation, showing changes in output only.

Question 3

What is GDP per capita?

Answer 3

GDP per capita is GDP divided by the population. It indicates average income and helps compare living standards.

Question 4

What is Gross National Income (GNI)?

Answer 4

GNI is GDP plus net income earned from abroad (e.g. income from overseas assets).

Question 5

What is Purchasing Power Parity (PPP)?

Answer 5

PPP adjusts GDP to account for differences in price levels between countries, improving comparisons of living standards.

Question 6

Why is GDP an imperfect measure of living standards?

Answer 6

Ignores inequality

Omits unpaid work

Excludes externalities

Doesn’t reflect quality of life or sustainability

Question 7

What is inflation?

Answer 7

Inflation is the sustained rise in the general price level over time.

Question 8

How is inflation measured in the UK?

Answer 8

CPI (Consumer Prices Index) – excludes housing costs

RPI (Retail Prices Index) – includes mortgage interest and council tax

Question 9

What is disinflation?

Answer 9

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

Question 10

What is deflation?

Answer 10

A fall in the general price level (negative inflation rate).

Question 11

What are the causes of inflation?

Answer 11

Demand-pull inflation: AD increases faster than AS

Cost-push inflation: Rising input costs (e.g. wages, oil)

Question 12

What are the consequences of inflation?

Answer 12

Loss of purchasing power

Fall in international competitiveness

Uncertainty for investment

Distorted price signals

Redistribution effects (e.g. savers lose)

Question 13

How is unemployment measured in the UK?

Answer 13

Claimant Count: People receiving Jobseeker’s Allowance

Labour Force Survey (ILO measure): Surveys those actively seeking work

Question 14

What is underemployment?

Answer 14

Workers who are employed below their skill level or want more hours than they have.

Question 15

What are the types of unemployment?

Answer 15

Cyclical: Due to falling AD (also called demand-deficient)

Frictional: Time between leaving one job and starting another

Structural: Skills mismatch or regional differences

Seasonal: Linked to time of year or industry cycles

Question 16

What are the consequences of unemployment?

Answer 16

Lower income and living standards

Reduced tax revenue

Increased government spending on benefits

Loss of productive potential

Social issues (e.g. crime, mental health)

Question 17

How can migration affect employment and unemployment?

Answer 17

Increases labour supply

May fill skill shortages

Could increase competition for jobs, particularly in low-skilled sectors

Question 18

What is the current account?

Answer 18

Part of the balance of payments. It records:

-Trade in goods and services

-Primary income (investment income)

-Secondary income (transfers like aid)

Question 19

What is a current account deficit?

Answer 19

Imports exceed exports (net outflow of money on the current account).

Question 20

What causes a current account deficit?

Answer 20

High consumer spending on imports

Poor competitiveness

Strong exchange rate

Low productivity

Question 21

Why is a current account deficit a problem?

Answer 21

May indicate uncompetitive economy

Can lead to depreciation of currency

May require borrowing to finance

Question 22

What is a current account surplus?

Answer 22

Exports exceed imports (net inflow of money on the current account).

Question 23

What is the Easterlin Paradox?

Answer 23

The Easterlin Paradox suggests that beyond a certain income level, increases in income have a diminishing impact on individual happiness

Question 24

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

Answer 24

GDP may not account for:

Income distribution disparities

Non-market transactions (e.g., household labor)

Differences in cost of living

Environmental degradation

Variations in data collection methods

Question 25

What is the difference between CPI and RPI?

Answer 25

The Consumer Price Index (CPI) excludes housing costs like mortgage interest payments, whereas the Retail Price Index (RPI) includes them.

Question 26

What are the limitations of using CPI as a measure of inflation?

Answer 26

CPI may not reflect: Changes in product quality Substitution between goods Regional price variations Individual consumption patterns

Question 27

What is the difference between the Claimant Count and the Labour Force Survey (LFS)?

Answer 27

The Claimant Count measures the number of people receiving unemployment benefits, while the LFS surveys individuals to determine if they are unemployed, regardless of benefit claims.

Question 28

What are the limitations of using the Claimant Count as a measure of unemployment?

Answer 28

It may understate unemployment due to: Eligibility criteria for benefits Stigma associated with claiming benefits Differences in benefit systems over time

Question 29

What are the components of the current account?

Answer 29

The current account includes: Trade in goods Trade in services Primary income (e.g., dividends, interest) Secondary income (e.g., foreign aid, remittances)

Question 30

What are the implications of a current account deficit?

Answer 30

A persistent deficit may indicate: Over-reliance on imports Loss of competitiveness Increased foreign debt Potential downward pressure on the currency

Question 31

What is the formula for calculating the inflation rate?

Answer 31

Inflation Rate= CPI in current year−CPI in previous year / CPI in previous year ×100

Question 32

What is CPI and how is it calculated?

Answer 32

CPI (Consumer Prices Index) measures average price changes of a "basket" of goods and services typically consumed by households. Prices of around 700 goods and services are tracked monthly. Each item is weighted according to its share in typical household spending. Weighted price changes are combined to calculate the index.

Question 33

Why is weighting used in CPI calculation?

Answer 33

To reflect the relative importance of each item in household budgets. Items with higher spending have a greater impact on the final CPI. E.g. If households spend more on petrol than toothpaste, petrol has a higher weight.

Question 34

How are the weights for CPI determined?

Answer 34

Weights are based on survey data from the Living Costs and Food Survey, which monitors how households actually spend their money.

Question 35

What is a price index?

Answer 35

A price index measures the average change in prices over time compared to a base year. Index in base year = 100 Other years show percentage change relative to the base.

Question 36

How is the weighted price index calculated?

Answer 36

Each item’s price change (%) is multiplied by its weight, and the results are summed.