Measure of economic performance

Question 1

Define a Recession + effects + examples

Answer 1

When an economy suffered 2 consecutive quarters of negative economic growth
- Recession = less spending, income + output
–> firm closures, increased unemployment + fall in standard of living
- UK recession in 2008 (financial crisis) + 2020 (COVID-19)

Question 2

What is Potential Economic Growth

Answer 2

Measure of the increase in productivity capacity
–> shown by outwards movement of PPF

Question 3

What is the difference between Nominal and Real GDP?

Answer 3

Nominal - Money value of all goods and services produced in 1 Year
Real - Nominal GDP adjusted for Inflation
–> used to measure changes in volume of output over time

Question 4

GDP Per Capita defintion + uses

Answer 4

Per Capita = GDP ➗ Country Pop.
- Meaningful measure of living standards
- Allows for comparison between countries

Question 5

Value vs Volume measures of GDP

Answer 5

• Volume of Output = Amount of Goods produced
• Value of Output = Amount of Goods produced x Price sold at

–> Increase in Volume of Output doesn’t mean increase in Value
–> If Prices ↓, Even if Volume ↑Value may still fall

Question 6

GDP vs GNI

Answer 6

GDP = Gross Domestic Product
- Total Goods + Services produces or amount spend in 1 Year

GNI - Gross National Income
- GNI = GDP + (X-M)
(Income received domestically + Net incomes from overseas)

Question 7

What does PPP mean

Answer 7

Purchasing Power Parities
- Used to compare GDP of different goods, takes cost of ‘basket of Goods’ into account

• PPP exchange rate is rate that equalises the Purchasing Powers

Question 8

What figure is often used to compare standard of living between countries + what are the limitations of this (7)

Answer 8

• GDP
• Standard of living + income + quality of Life (housing, health, environment, safety)

Limitations (can also be used for over time comparison)
- Differences in population –> use GDP per capita
- Difference in rates of inflation –> use R.GDP
- Level of Output self-consumed (so does not appear as GDP)
- Methods of calculation + reliability may differ
- Type of spending by Gov –> money spent on warfare or improving Quality of Life (ed, health)
- Differences in Income distribution / equality
- Differences in Exchange rates (only countries)

Question 9

National Happiness, why is it used, how is it measured in UK?

Answer 9

• Used due to limitations of GDP

UK gov does regular surveys of personal well-being –> measure emotions e.g. happiness or anxiety
- Measures strongly related to quality of life factors e.g. health, employment
- Attempts to measure subjective happiness
- Needs to be overtime for accurate results

Question 10

What is the relationship between Real Incomes and Subjective Happiness?

Answer 10

• Positive relationship between incomes + happiness (up to certain income)
  –> once above that point, marginal gains in happiness fall
  –> called Easterlin Paradox
• Implication of Easterlin paradox - Gov focus on clean environment + income equality as well as economic growth