Measuring Economic Performance

Question 0

Define GDP.

Answer 0

GDP is the total amount of goods and services produced in a country in one year, or the total amount spent, or the total amount earned.

Question 1

What is economic growth a measure of?

Answer 1

An increase/decrease in real gross domestic product (GDP).

Question 2

What is potential economic growth a measure of, and what is it shown as on the PPF graph?

Answer 2

It is the increase in the productive capacity of an economy, shown by an outward shift of the PPF curve. It is also a measure of how efficient an economy is at using its resources.

Question 3

What defines a recession, and what does it mean in real terms?

Answer 3

A recession is two consecutive quarters of negative economic growth in an economy and it means that there is less spending, income, and output in the economy.

Question 4

What are the effects of recession?

Answer 4

Recessions often lead to firms closing, increased unemployment and a resultant fall in living standards.

Question 5

What does ‘real’ mean?

Answer 5

A ‘real’ value is a value that takes inflation into account.

Question 6

What do ‘nominal’ and ‘current’ mean?

Answer 6

A ‘nominal’ or ‘current’ value is one that does not take into account inflation.

Question 7

Which factors affect to what extent an rise in GDP increases standards of living?

Answer 7

Wealth distribution, population size, whether inflation is being accounted for, and the amount being spent on investment.

Question 8

What is GDP per capita and why is it used?

Answer 8

GDP per capita (per head) is the total GDP divided by the population and is used because population cannot be assumed to be constant when looking at GDP, so GDP per capita gives a better indicator of incomes.

Question 9

When looking at the GDP of one country compared to another, what factors must one take into account?

Answer 9

The original affluence of the country, how much of the output is self consumed, methods of calculation and reliability of data, relative exchange rates, and how the government assigns it’s spending.

Question 10

What is CPI?

Answer 10

The Consumer Price Index is a measure used for inflation targeting in the UK. It does not include housing costs such as mortgage repayments or rent.

Question 11

What is RPI?

Answer 11

The Retail Price Index is a measure of inflation AKA the headline rate. It includes housing costs such as mortgage repayments and rent.

Question 12

Describe how CPI is calculated.

Answer 12

CPI is given as an index number with regards to the previous year as the base year. The Living Costs and Food Survey collects information from a sample of around 7000 houses in the UK using self-reported diaries of all purchases. Weights are assigned to each item that is bought by the average household. The weights show the proportion of income spent on each item. A price survey is undertaken by civil servants who collect monthly data on changes in the price of the 650 most commonly used goods and services.

Question 13

What is the inflation target?

Answer 13

The UK government tasks the Monetary Policy Committee with the objective of 2% inflation with a range of tolerance of 1%.

Question 14

Define being ‘economically active’.

Answer 14

Anyone who is at work or is willing to work is economically active. This is also called the workforce.

Question 15

What are the 4 main types of unemployment?

Answer 15

Cyclical, Structural, Frictional, and Classical.

Question 16

Define Cyclical unemployment.

Answer 16

Cyclical or demand deficient unemployment is where lack of spending in the economy/recession means people are out of work.

Question 17

Define Structural unemployment.

Answer 17

Structural unemployment is where industries are in decline and worker’s skills are becoming obsolete.

Question 18

Define Frictional unemployment.

Answer 18

Frictional unemployment is where people are between jobs.

Question 19

Define Classical unemployment.

Answer 19

Classical unemployment is where there are problems with the supply side of labour.

Question 20

What are the costs of unemployment?

Answer 20

• Costs to the person due to lack of income.
• Non-income costs to the unemployed person such as depreciation of skills and confidence.
• Costs to firms as people don’t spend as much in shops etc.
• Costs to governments as they pay more for JSA and receive less income through tax.

Question 21

Which two measures of unemployment are used in the UK?

Answer 21

• The ILO measure (conducted by the Labour Force Survey) uses a questionnaire to ask people between 16-65 whether they have been out of work for four weeks and are ready to start work within the next two weeks.
• Meanwhile the Claimant Count records people who have successfully claimed JSA.

Question 22

What are the benefits of increase employment?

Answer 22

• Increased Incomes with rises in standards of living for households.
• Improved Skills (Human Capital).
• Multiplier Effects as increased incomes lead to increased spending, so firms may see increases profits.
• Higher Government Taxation Revenue and falling spending on JSA.

Question 23

Does immigration lead to a change in employment?

Answer 23

If people migrate to fill empty jobs (vacancies) then employment will rise, but if immigrants are looking for work and there are no vacancies then employment may remain unchanged and unemployment may rise.

Question 24

Define the balance of payments.

Answer 24

The balance of payments is a record of international payments over the course of the year.

Question 25

What is the purpose of the current account?

Answer 25

The current acount records payments for transactions in the present year.

Question 26

What three accounts is the balance of payments made up of?

Answer 26

The current account, the capital account and the financial account.

Question 27

What is the current account comprised of?

Answer 27

• Trade in goods (visible or tangible products).
• Trade in services (invisible or intangible products).
• Investment income (interest, profit and dividends).
• Transfers (e.g. tax payments to foreign governments).

Question 28

When does a current account deficit occur?

Answer 28

A current account deficit occurs when more money is flowing out of the country than is flowing in on the current account.

Question 29

What are the potential causes of a current account deficit?

Answer 29

• The currency is too strong compared to other countries which will increase imports and decrease exports.
• High rates of inflation compared to other countries.
• High wage costs relative to other countries.
• High levels of growth in a country, meaning people with higher incomes tend to buy more imports from abroad.

Question 30

What factors may cause a current account surplus?

Answer 30

• The currency is too weak compared to other countries so exports increase and imports decrease.
• Low rates of inflation relative to other countries.
• Low wage costs compared to other countries.
• Low level growth in a country, making it difficult to but imports from abroad and creating a strong incentive for firms in the country to export.

Question 31

What is the Human Development Index?

Answer 31

HDI is a composite measure of quality of life which has one third weighting for education, one third for health and one third for GDP per head at purchasing power parity.

Question 32

Define purchasing power parity.

Answer 32

An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency’s purchasing power.

Question 33

What are some benefits of other measures of development rather than HDI?

Answer 33

• HDI does not give a strong indication of how living standards might change in the future.
• HDI does not indicate deprivation, i.e. what people are going without, such as water.
• HDI is not clear on poverty lines and how difficult life might be for some people.
• Other measures might be useful in conjunction with GDP or HDI to give a broader picture of how well a country is developing.

Question 34

What are the two types of inflation?

Answer 34

Cost Push Inflation and Demand Pull Inflation

Question 35

What is demand pull inflation?

Answer 35

This kind of inflation occurs when aggregate demand is increasing at an unsustainable rate, putting pressure on scarce resources, so there is excess demand. This leads to firms increasing prices to maximise profits.

Question 36

What is cost push inflation?

Answer 36

Cost push inflation occurs when costs of production increase so firms increase prices to protect profit margins

Question 37

What are the limitations of CPI?

Answer 37

The weightings are an average of the population so it will be accurate for very few people. Does not represent the spending patterns of different people.