9 The Measurement of Macroeconomic Performance Flashcards
(251 cards)
1
Q
What are the 4 macroeconomic objectives of governments?
A
- Achieve economic growth and improve living standards/economic welfare
- Create and maintain full employment
- Limit and control inflation
- Attain a satisfactory balance of payments and avoid external deficits which might create an exchange rate crisis
2
Q
What is short-run economic growth?
A
Short-run economic growth occurs when there are unemployed resources in the economy, e.g., labour.
3
Q
What is GDP?
A
Gross Domestic Product is the value of all goods and services produced in an economy in one year.
4
Q
What is Real GDP?
A
Real GDP is GDP adjusted for inflation.
5
Q
What is Nominal GDP?
A
Nominal GDP is GDP not adjusted for inflation.
6
Q
What is the Eurozone?
A
The group of European Union nations whose national currency is the euro.
7
Q
How many EU states are there and how many have joined the Eurozone?
A
There are 27 EU states, and 19 have joined the Eurozone.
8
Q
What is a recession?
A
A recession is defined as 2 consecutive quarters of declining real national output (GDP).
9
Q
What is a depression?
A
A depression is a long and severe recession.
10
Q
What defines full employment in the UK?
A
Full employment is defined as below 3% unemployment according to the Beveridge Report.
11
Q
What do free marketeers define full employment as?
A
Full employment is when the aggregate supply of labour equals the aggregate demand of firms, establishing a market clearing price for labour.
12
Q
Does full employment mean 0% of people out of work?
A
No, it includes structural unemployment and a constant rate of people between jobs.
13
Q
How do governments measure unemployment in the UK?
A
Through the Labour Force Survey, a quarterly sample of who is in work and who is not.
14
Q
What is the difference between unemployment and economic inactivity?
A
Economically inactive means not seeking employment.
15
Q
What is the ONS uncertainty in LFS?
A
+/-3%
16
Q
What is inflation?
A
A general and persistent rise in the average price level across markets.
17
Q
Is a 10% rise in house prices inflation?
A
No, because it is not across the whole economy.
18
Q
Is 0% inflation achieved?
A
Extremely rarely.
19
Q
What is the official inflation rate target?
A
2%
20
Q
What is deflation?
A
Negative inflation.
21
Q
What is disinflation?
A
A reduction in the rate of inflation.
22
Q
What is the CPI?
A
A price index.
23
Q
When was RPI used?
A
Before 2011.
24
Q
What is the CPI in form?
A
A basket of 700 goods and services which are price audited by the ONS.
25
Why was RPI abandoned?
Big ticket items such as housing stock were included.
26
What is indexation?
The automatic adjustment of the value of goods and services to price indexes to keep up with long-term changes in price levels (inflation/deflation).
27
What is core inflation?
Inflation with some staples such as foods removed, which often respond more aggressively.
28
What is headline inflation?
Short term inflation.
29
What is underlying inflation?
Long term inflation.
30
How to calculate real term economic growth?
Real GDP in Year X = Nominal GDP in Year X x (Price Level in Year X-1/Price Level in Year X).
## Footnote
Nominal GDP in 2022 is 1270, and price level is 100. Nominal GDP in 2023 is 1410 and price level is 108. The real term economic growth is 2.8%.
31
What is the balance of payments?
The comparison between currency leaving the country and the currency entering the country.
32
What is the current account?
The money value of exports and the money value of imports compared to deduce the balance of trade.
33
What happens when the money value of imports exceeds the money value of exports?
There is a balance of trade deficit.
34
What happens when the money value of imports is less than the money value of exports?
There is a balance of trade surplus.
35
What state of balance of payments is desirable?
Balanced.
36
Why do some people want a balance of trade surplus?
A surplus supports AD and hence economic growth, but not all countries can sustain one mathematically, making it often seen as a bad thing at an international macro level.
37
What is a budget deficit/surplus?
The difference between tax revenue and government expenditure.
38
What are tertiary macroeconomic objectives?
1. Equitable distribution of income
2. Balancing the budget
39
When did the budget deficit grow?
2008-09 and 2020-21.
40
When is a balanced budget achieved?
When government spending (G) equals taxation (T).
41
Do most macroeconomists believe all macroeconomic objectives are achievable at the same time?
No, there are trade-offs.
42
What are 4 of the main macroeconomic policy conflicts?
1. Full employment/growth and balance of payments
2. Full employment/controlling inflation
3. Economic growth/equitable distribution of income
4. Higher short term living standards/higher future living standards.
43
Why is economic recovery a goal of macroeconomies?
Moving onto the PPF.
44
What is Money GDP?
Another term for nominal GDP.
45
What is the nominal GDP formula?
Real GDP x Price Index.
46
What are the 2 definitions of full employment?
1. Beveridge definition - at or below 3%
2. Free market definition.
47
What is the free marketeer definition of full employment?
When an equilibrium is reached at the market clearing wage rate.
48
What is the free marketeer definition of full employment diagram?
D&S graph but Y axis is real wage rate.
49
Why is Beveridge's definition preferred?
It takes into account long-term unemployment.
50
How did the UK government originally measure unemployment?
Through the Claimant count for benefits, but this changed with the introduction of universal benefits leading to the adoption of the Labour Force Survey.
51
Why is Claimant Count nominally much lower than labour force survey unemployment?
Not all unemployed are eligible for benefits. This was not the case during COVID-19 when claimants of universal benefits increased.
52
When is it not inflation if relative prices change?
When goods/services which make up a large fraction of consumer spending, e.g., food, experience cost-push inflation.
53
What is the target inflation rate?
2% CPI.
54
Why is CPI better for governments politically?
It is generally lower than RPI because it excludes housing costs, making inflation 'locked' items like pensions cheaper in real terms.
55
What is the largest component of the balance of payments?
The balance of trade.
56
Why do most economists believe a balance of payments equilibrium is satisfactory?
It is impossible for all countries to have a balance of payments surplus.
57
Is economic policy conflict major in the short-run?
Yes.
58
Is economic policy conflict major in the long-run?
It depends who you ask.
59
What does short run mean?
When one or more factors of production is fixed, but macroeconomists have different definitions.
60
Example of how macroeconomic policy objectives have changed over time?
In the period 1945-79, the main policies of both Conservative and Labour governments were interventionist, focusing on full employment, stable economic growth, and equitable distribution of wealth. This changed in 1979.
61
Example of how controlling inflation has become a bipartisan key objective?
Norman Lamont said high unemployment was a price 'well worth paying' to keep inflation under control.
62
Which macroeconomic objective is currently lowest on the list?
Balance of payments.
63
Why did free market economists believe the Depression happened?
Unions preventing wage falls and deflation necessary to rebalance the economy.
64
Why did Keynesians think the Depression happened?
Low animal spirits; people would not invest just because wages are lower.
65
Famous Keynes quote about changing his mind?
'When the facts change, I change my mind - what do you do, sir?'
66
What is a macroeconomic indicator?
Something that gives an indication of the performance of an economy, allowing comparison to macroeconomic objectives.
67
What does a 2% CPI inflation rate indicate?
A success of monetary policy, especially for monetarists.
68
What are lead indicators?
Performance measures that predict future performance.
69
What are lag indicators?
Performance indicators that reveal the results of past actions and decisions.
70
An increase in the number of overseas holidays booked is a...
Lead indicator indicating an increase in AD.
71
Is CPI a macroeconomic indicator?
Yes.
72
What is the base number in an index?
Usually 100, so you can figure out percentage change from the base year.
73
If the base number is 100 and the 3rd year it is 78, what can we say about the change?
A 22% fall.
74
GDP per head in Country L is 100 on an index in 2015. In 2020 it is 115 on the same index. In Country M, in 2015, it is 100 on an index, and by Country M's index it is 108 in 2020. Which is correct?
C. The rate of increase of GDP per head was greater in Country L than in Country M.
75
'GDP at current prices' means...
Nominal GDP.
76
What are the 3 price indices?
1. CPI
2. CPIH
3. RPI
77
What is the base year for CPI/CPIH?
2015.
78
Why is the CPI not a statistic of price levels?
It is an index number and does not take account of specific figures, only price levels as a proportion of the levels in 2015.
79
When was households' savings ratio at its lowest?
2019, the lowest since 1999, revealing low interest rates create low savings ratios.
80
Why is a low interest rate an incentive not to save?
People are reluctant to borrow but do to 'fill the gaps' and cover the rest of the costs with their savings.
81
What is the FTSE 100?
An index, based at 1000 in 1984, which contains the 100 largest companies on the London Stock Exchange.
82
What is the main benefit of index numbers?
Easier to make comparisons over time.
83
Why can rising inflation cause a surge in AD?
Households bring forward big ticket spending.
84
Why does spending fall when people are unemployed?
No reliable income.
85
What is national income?
The flow of new output produced by the economy in a particular period, measured by the flow of factor incomes.
86
What is national product?
The flow of new output produced by different industries in a particular period, also known as national output.
87
What is national output?
Another name for national product.
88
What is the national capital stock?
All the capital goods in the economy, excluding working capital or human capital.
89
What is national wealth?
The stock of all goods that exist at a point in time that have value in the economy.
90
What can be included in national wealth?
The entire national capital stock.
91
What is national income more simply defined?
The flow of new output produced by the stocks of physical and human capital and other factors of production.
92
What are the 3 components of national income?
1. Replacement investment to replace capital consumption
2. Net investment that enlarges the capital stock
3. Income available for consumption and betterment of living standards.
93
Why does the economy shrink if no investment takes place?
Due to capital consumption.
94
What is the link between investment and economic growth?
Investment leads to capital base growth, which results in economic growth.
95
What is the relationship between GDP and national income?
GDP is a measure of national income.
96
What is a flaw of GDP?
It only measures domestic production, not accounting for leakages or injections into the circular flow of income from assets owned overseas.
97
What is GNI and when is it better than GDP?
A direct measure of national income that accounts for circular flow changes, providing a better standard of living indicator.
98
When is GDP better?
When giving an accurate indication of what is made in the UK.
99
Which is bigger, GNI or GDP?
GDP, due to leakages.
100
Why is GDP useful as a statistic on its own?
As a proxy for economic welfare satisfaction and the benefits therein.
101
What is a flaw with GDP as a proxy of living standards?
Income inequality.
102
What are 4 flaws of national income data?
1. Non-monetised economy omitted
2. Informal markets, e.g., cash transactions
3. Quality changes not accounted for, only output
4. Negative externalities mean that extra output could be at the expense of actual welfare.
103
What are 3 flaws of using national income data to compare differences in living standards between countries?
1. Non-monetised economy of different significance in different countries
2. Exchange rate makes direct comparisons in a relevant currency difficult
3. Traded and non-traded goods.
104
What is a PPP exchange rate?
Exchange rates that eliminate the differences in real purchasing power between countries by eliminating the differences in price levels.
105
What does productivity mean?
Output from a given factor of production over a given unit of time.
106
What is the link between productivity and productive efficiency?
Productive efficiency can be used as a measure of productivity.
107
How would supply-siders improve productivity?
1. Financial incentives
2. Technological improvements
3. Training
4. Organisational restructuring.
108
What does organisational restructuring mean?
Changing the firm to improve efficiency, e.g., changing business practice such as reducing unnecessary meetings.
109
What illustrates suboptimal productivity?
A point below the PPF.
110
What is public debt?
Government debt.
111
How would supply-siders improve productivity?
1. Financial incentives
2. Technological improvements
3. Training
4. Organisational restructuring
112
What does organisational restructuring mean?
Changing the firm to improve efficiency e.g. changing business practice such as reducing number of unnecessary meetings.
113
Suboptimal productivity is illustrated...
As a point below the PPF.
114
Why do governments aim to balance the budget and keep the national debt low?
Opportunity cost of interest payments which the government must make to borrow are high.
115
Why are exports prioritised as a government macroeconomic objective?
Maintain economic competitiveness.
116
Example of how different governments have different inflation targets?
India has 4%.
117
All macro policy solutions have trade offs. What is the one for reducing inequality?
Might reduce the incentives.
118
3 trade offs of economic growth?
1. Resource constraint and fixed supply capacity could lead to inflation
2. Income inequality concentrated
3. Environmental concerns
119
Why is the deficit often seen as a long run macroeconomic policy?
Easier to deal with when tax revenues are higher e.g. after economic growth or a fall in unemployment.
120
Is nationalisation necessarily ineffective? Evidence?
No
## Footnote
2004 research suggests that it was only the way they were being managed in the UK - a divorce of ownership from control occurred.
121
2 key positive effects of economic growth?
1. Incomes rise
2. Living standards rise.
122
Is GDP the best measure of living standards? Alternatives?
No, because it doesn't factor in population size and inequality.
## Footnote
GDP per capita and possibly HDI.
123
Why does Claimant Count underestimate unemployment?
Some don't claim for reasons of esteem, information failure or sizeable wealth.
124
Why is employment a flawed measure of economic performance?
Doesn't tell you about the type of work: the person could be UNDEREMPLOYED or their wages could be too low.
125
What is productivity measured in?
Money terms.
126
What is the ILO measure of unemployment and why is it good?
A monthly survey - seeking work for past 4 weeks but able to begin work within 2.
## Footnote
It is an internationally agreed effective measure.
127
What does international competitiveness mean?
How likely are we to sell our exports.
128
How to calculate an index value?
(Current value / base year value) x 100.
129
A price level increases from 120 to 132 in index numbers. This indicates a price rise of:
10%.
## Footnote
Careful.
130
What is the use of national income data?
Living standards.
131
What is PPP?
Purchasing Power Parity.
132
3 adjustments made to national income data to make comparison easier?
1. GDP per capita
2. PPP for inflation
3. Cost of living adjustments.
133
What is the shadow economy?
Economic activity not registered in GDP.
134
What is a negative expenditure and how does it undermine GDP?
GDP spent on no net contribution to economic welfare e.g. cleaning up graffiti.
135
4 reasons GDP is not a great measure of living standards?
1. Productivity - same GDP but working more hours = lower living standards
2. Long-run versus short-run - if GDP is being spent depleting finite resources or not developing capital then this could show up in the long run
3. Shadow economy not included
4. Issues with data e.g. inequality, nominal values, data collection problems, shadow economy.
136
What is arbitrage? How does it fix exchange rates?
If it is profitable to buy in country X and resell in country Y at a profit, we will do this.
137
PPP exchange rate formula
S = P1/P2
## Footnote
P1 = Cost of Good X in Country Y
P2 = Cost of Good X in Country X.
138
Why is a balance of payments equilibrium seen as important?
Prevent an exchange rate crisis.
139
How do most countries define a recession? UK?
6 months or more of negative economic growth/declining real national output.
## Footnote
This is the definition used. Think about it: 2 consecutive quarters = 6 months.
140
Short-run economic growth
Growth of real output resulting from the employment of idle resources, including labour - considered to be 'taking up slack' in the economy.
141
Long-run economic growth
Increase in the economy's potential level of real output.
142
Example of how bad a recession can be?
1932 - Real GDP in the USA had fallen by 31% since 1929.
143
When did 3% unemployment effectively become a government target?
1944 - Beveridge Report.
144
Why was Claimant Count abandoned?
Unreliable - not linked to unemployment in the same way LFS was.
145
When did Claimant Count exceed LFS?
COVID-19 due to furlough - includes those on UC.
146
Is the LFS a census?
No. It only samples 100,000 people in 40,000 randomly sampled households.
147
What is inflation?
A persistent or continuous rise in the average price level.
148
Inflation must not be confused with...
An increase in price in a market.
149
Potentially partisan reason CPI has been used since 2011 in place of RPI?
CPI
150
Peak inflation reached in 2022?
11.1% in the UK, 9% in the US.
151
What items does 'core' inflation strip out and why?
Food and fuel
## Footnote
Volatile.
152
Underlying and core inflation are...
Basically the same thing.
153
What is the balance of payments?
The difference between the flow of all money into a country and out of it for a given time period.
154
2 main sections of the current account?
1. Money value of exports
2. Money value of imports.
155
The current account is...
Part of the balance of payments.
156
What is the balance of trade?
The difference between the money value of a country's imports and its exports.
157
Balance of trade deficit?
Money value of imports > Money value of exports.
158
Balance of trade surplus?
Money value of exports > Money value of imports.
159
Evaluative comment on the macroeconomic objective of reducing inequality?
Does not seem to have been all that important recently.
160
How specifically do free market economists believe that it will be possible to achieve all macroeconomic objectives simultaneously in the long run?
Successful supply-side policies.
161
How is the monetarist approach conservative?
Emphasis on order before prosperity.
162
Who epitomised how full employment is not the government's objective today?
1993 - high unemployment was a 'price well worth paying' for keeping inflation under control.
## Footnote
Norman Lamont, then Chancellor and future victim of the great PHIL WILLIS.
163
How can modern government macroeconomic policy be described?
'Loose' with monetary policy
'Tight' with fiscal policy.
164
Example of a lead indicator for inflation?
Commodities prices begin to rise.
165
Fundamental flaw with all macroeconomic indicators?
INFORMATION FAILURE - hard to measure things like this with accuracy.
166
What is the 'skip index'?
A lead indicator pioneered by the Sunday Times Economics Editor David Smith.
## Footnote
You can judge consumer confidence, and hence future spending, by number of skips, as it indicates building work.
167
How can a crane index be turned on its head?
Could indicate overconfidence.
168
CPI is presented in the form of...
Index numbers with a base of 100 in the year 2015.
169
What is in CPIH not in CPI? Eval
Owner-occupied housing costs and council taxes.
## Footnote
Significantly more accurate in a property owning economy like the UK - ONS says it is the most accurate measure of consumer price inflation.
170
Are CPI and CPIH 'cost of living indices'?
No - not all of the 'representative items' are necessities.
171
What are 'representative items'?
The things in the CPI/CPIH baskets considered to be representative of household spending.
172
Example of CPI basket changing to reflect changing consumer preferences?
2022 - anti-bacterial wipes added to the basket.
173
Is CPIH on the syllabus?
No.
174
Product X:
Year 1 Price 6, Year 2 Price 9, Weight 1
Product Y:
Year 1 Price 12, Year 2 Price 18, Weight 3
Product Z:
Year 1 Price 20, Year 2 Price 15, Weight 2
Total inflation rate?
25%.
175
What is the household savings ratio in the UK? Eval?
6% in 2019, up to over 10% in 2025.
## Footnote
Result of UNCERTAINTY but also LIQUIDITY TRAP - LOW IR in 2019.
176
2 things the national capital stock includes? 2 things it excludes?
1. Social capital i.e. capital managed by the state
2. All capital goods deployed in the economy.
## Footnote
1. Human capital
2. Consumer goods.
177
2 areas, other than to consumption and hence towards raising living standards, that national output can go to?
1. Capital consumption re-investment
2. Net investment.
178
If capital consumption re-investment does not take place...
The national capital stock shrinks.
## Footnote
Negative economic growth occurs and the PPF shifts inwards.
179
If capital net investment occurs...
The national capital stock increases.
## Footnote
Positive economic growth occurs and the PPF shifts rightwards.
180
Gross investment
Net investment + Depreciation.
181
Using less of national output to invest in replacement and net investment means that...
Current consumption will be higher, but that long-term economic growth will be compromised.
182
What is the difference between GNI and GDP? Eval?
GDP is the flow of output produced domestically within the economy, but GNI and its ally GNP take account of income flows overseas.
## Footnote
This means it has a better measure of how much national income is actually in the UK and hence the standard of living available.
183
Why is GDP still used more than GNI/GNP despite the obvious benefits?
1. GDP is a better measure of productivity of UK industry.
2. Incumbency - we have always used GDP.
184
How can we measure standards of living enjoyed by the average person using national income data and caveat?
GDP per capita.
## Footnote
GDP=/=GNI. Inequality.
185
5 problems with using national income statistics to measure living standards?
1. The non-monetised economy
2. Hidden economy
3. Quality changes
4. Negative externalities
5. Income inequality.
186
How big is the hidden economy in the UK? Other countries?
~10% of UK economy, 20-30% of Greece or Italy's.
187
What is the difference between the hidden economy and the non-monetised economy?
Hidden - cash transactions where tax evasion takes place.
Non-monetised - where no one pays anything.
188
Example of how quality changes can lead to misleading national income statistics?
Paying more for an inefficient service e.g. worsening bus transport means that GDP rises whilst quality and welfare may well have deteriorated.
189
How does the existence of negative externalities preclude the usefulness of national income statistics?
Negative externalities means that goods are over produced, and hence spending and national income rises, even if welfare has fallen.
190
Why is simply using an exchange rate insufficient to compare living standards between countries?
Exchange rates often do not float freely, and demand for currency for some goods markets may not reflect actual cost of living.
191
When we don't use PPP exchange rates, market exchange rate calculations mean that we tend to _____ the cost of living in less developed countries.
Overestimate.
192
How does PPP work?
Bundle of goods and services - the rate of currency conversion means that the purchasing power of different currencies is equivalent in price levels between countries.
193
Famous example of a PPP index?
Economist publishes an annual Big Mac index - price of Big Macs worldwide.
194
When are market exchange rates better than PPP?
When we are evaluating financial flows.
195
Why is the Big Mac index flawed?
Only one good or service under evaluation.
196
Who makes PPP calculations?
International Comparisons Program of the UN.
197
Which goods in developing countries tend to be cheaper than in developed countries? Why?
Those which are NOT TRADED INTERNATIONALLY - market based rates are only relevant to internationally traded goods.
## Footnote
Different production techniques e.g. more labour intensive.
198
One main advantage of PPP rates?
Less volatile.
199
Drawback of PPP?
Requires 1000 closely specified products, and it is harder to measure.
200
PPP is better regarded than market exchange rates as a measure of...
Comparative economic welfare and standard of living.
201
National income and national product
USED INTERCHANGEABLY.
202
Example of a country where GNI > GDP?
Norway - large sovereign wealth fund with foreign holdings.
203
When was the Big Mac index pioneered?
1986.
204
True or false - national income statistics ALWAYS underestimate the scale of real economic activity?
True - non-monetised and hidden economy.
205
When did deflation last occur in the UK? Eval?
Briefly in 2014-15.
## Footnote
Both malign and benign - falling oil prices but also low AD after the recession.
206
What determines the relationship between GNI and GDP?
Net income from abroad.
207
Macroeconomics
The study of the performance of an economy. How well does an economy satisfy the key objectives.
208
3 signs of good economic growth?
1. Strong
2. Sustained
3. Sustainable.
209
Trade deficit
Imports > Exports.
210
Why is balanced trade the objective?
1. Surplus -> AD DP inflation
2. Deficit -> BOP crisis and CP inflation from depreciating currency.
211
What is the best distribution of income and why?
'Fair' - normative statement.
212
TIGERS
Trade
Inflation
Growth
Employment
Redistribution of incomes
Stability!
213
Macroeconomic stability
Consistent satisfaction of the main macroeconomic objectives.
214
What factor of production do households supply to firms?
All of them.
215
Households supply their ____ to firms. In exchange, they receive...
Factors of production
Factor incomes.
216
2 sectors excluded from the two-sector circular flow model?
1. Government
2. International economy.
217
Investment
Spending by FIRMS on CAPITAL GOODS.
218
For the circular flow model, how can we show growth? How can we show a decline?
Growth - injections > leakages
Decline - leakages > injections
Equilibrium - leakages = injections.
219
3 methods of calculating GDP
1. Output
2. Expenditure
3. Income.
220
Output method of calculating GDP
Sum of the values of all goods and services produced in the economy in a year - look at firms -> households on the CFI.
221
Income method of calculating GDP
Sum of the values of all factor incomes earned in an economy in a year - all factors of production. Firm -> household part of CFI.
222
Expenditure method of calculating GDP
Add up total expenditure - C+I+G+(X-M). Hence is the same as AD.
223
In the circular flow of income...
Output=expenditure=income.
224
2 reasons for the use of index numbers
1. To make numbers more visually comprehensible
2. To allow for quick and easy data comparisons.
225
Base year value is...
100.
226
Why are index numbers easy for comparison?
Percentage change from base numbers are easy.
227
Percentage change
(new-old)/old x 100.
228
Index number
(Raw/base.
229
What is the formula for total expenditure?
C + I + G + (X - M)
## Footnote
It is the same as Aggregate Demand (AD).
230
What does output equal in the circular flow of income?
Output = Expenditure = Income
231
What are two reasons for the use of index numbers?
1. To make numbers more visually comprehensible
2. To allow for quick and easy data comparisons
232
What is the base year value in index numbers?
100
233
How is percentage change calculated?
(new - old) / old x 100
234
What is an index number?
(Raw / base value) x 100
235
What is aggregate demand?
The total demand for final goods and services in an economy at any given price level.
236
Any measurement of national income is by definition...
A measure of economic growth
237
3 reasons national income data is useful?
1. Evaluate policies on objectives
2. Comparisons of economies
3. Help firms plan their demand
238
GDP
The value of all final goods and services produced in the economy within a year
239
2 things GDP can be measured with?
1. Measure of growth
2. Measure of living standards
240
3 problems with GDP as a measure of growth
1. Double counting - counting VA in primary and secondary
2. Informal/black markets
3. Errors given vast data collection
241
4 problems of GDP as a measure of living standards
1. Negative externalities
2. Income inequality
3. Other quality of life aspects
4. Type of output produced
242
Example of how type of output can affect the usefulness of GDP as a measure of living standards?
If it is all capital goods, then the increase in living standards is not immediate
243
GDP/capita formula
GDP/population
244
How can remittances undermine the usefulness of GDP statistics?
Not included because it is income from overseas - but nonetheless a useful determinant of living standards
245
What effect does FDI have on the GDP of developing countries?
Causes it to be OVER VALUED because the profits tend to be repatriated. But may be OFFSET by remittances
246
GNI
Total income earned by factors of production owned by a country, including those held overseas
247
GNI =
GDP + net factor income
248
Where is GNI PARTICULARLY preferable to GDP?
Developing countries, where the gap between GNI and GDP is large due to remittances and FDI
249
Green GDP and eval?
GDP - Environmental costs
Externalities hard to valuate and unlikely to be used because exposes environmental costs e.g. China used it and stopped because about 3% of GDP was wiped off
250
Best measure of welfare?
HDI - overcome issues of GDP
251
ECONOMIC GROWTH
An increase in real GDP in a year caused by an increase in AD or an increase in LRAS
