Measures Of Economic Performance- Theme 2 Flashcards
(50 cards)
Define GDP
GDP is the total value of goods and services produced in an economy
Define actual economic growth
An increase in real incomes or GDP.
Define potential economic growth
An increase in the productive capacity in a country.
Define real values.
Values that have been adjusted to remove the effects of inflation. The effects are removed using an index number that represents the changes in prices, the results are called constant values.
Define nominal values.
Values that are measured in money terms. Unadjusted, current values.
Distinction between value and volume.
Firms might achieve higher sales figures because they sell more in volume or number of products, but if those sales worth less per unit then they’re not seeing an increase in the value of their output.
Define gross national income (GNI)
GNI is the total amount of money earned by a nation’s people and businesses. calculated by adding income from foreign sources to GDP
Evaluation of the comparison of rates of growth between countries and over time.
- how well-off country is in first place.
- how much of output is self-consumed, so doesn’t appear as GDP.
- methods of calculation and reliability of data.
define term Purchasing Power Parities (PPP)?
An exchange rate of one currency for another which compares how much a typical basket of goods in one country costs compared to that of another country.
What are the limitations of using GDP to compare living standards between countries over time?
- the informal economy, some output is not recorded because it’s not bought or sold, but still output.
- currency values, difficulty knowing whether to use the official value of currency or the purchasing power of that currency.
- size of public sector, if much of spending in economy is by government, it might or might not improve welfare for population.
Define inflation.
A general and sustained increase in prices, measured by a change in a weighted index of prices.
Define deflation.
A fall in the general level of prices.
Define disinflation.
A fall in the rate of inflation. E.g. prices are rising more slowly.
How is the rate of inflation calculated using the CPI.
Through 2 surveys.
- the first survey on expenditure involves the collection of information about what people buy, currently known as the Office of National Statistics (ONS)Living Costs and Food Survey(LCF). Carried out by the ONS. Annual survey used to determine contents of virtual ‘basket’ of goods and services that households spend their money on, and proportion spent on each.
- the second survey is of prices. Undertaken by civil servants who collect data once a month about changes in the price of the 650 most commonly used goods and services in a variety of retail outlets. The price changes are multiplied by the weights to give price index. You can measure inflation from this by calculating the % change in this index over consecutive years.
What are the limitations of CPI in measuring the rate of inflation.
- measures cost of living only for an average household. The top and bottom 4% income brackets are not included, and nor are pensioners.
- there are sampling problems. Only 57% of households respond to the survey and when do respond may not give accurate information
- list of 650 items only changed once a year, but tastes and fashions change more quickly than this.
Describe the Retail Price Index as an alternative measure.
- more inclusive than the CPI in that it includes housing costs.
- not as reliable for international comparisons and the statistical method of basing data also unique to UK.
Define retail price index (RPI).
An index used to measure inflation that includes housing costs such as mortgage interest repayments.
Define Demand-pull inflation.
An increase in the general level of prices caused by increased consumption, investment, government spending or net exports.
- occurs whenever AD shifts to the right.
Define Cost-push inflation.
An increase in the general level of prices caused by increased production
Define money supply.
The amount of spending power in an economy it includes cash and bank deposits. Monetarists believe that an increase in money supply has a direct relationship with inflation.
What are the effects of inflation on consumers?
- the real value of savings falls as prices rise.
- the purchasing power of those on fixed incomes falls as prices rise.
- those with high levels of personal debt benefit from inflation, as the real value of the debt falls.
What are the effects of inflation on firms?
- loss of international competitiveness, exports expensive and imports cheap. BofP worsens.
- increased uncertainty, if firms think costs rising and fear increases in interest rates, they might curb investment.
- increased prices might be sign that firms can make more profits, therefore could mean investment is increased.
What are the effects of inflation for the government?
- redistribution of income. Those on fixed incomes will find incomes fall in real terms. Those with index-linked income won’t lose out unless they’re linked to a fairly unrepresentative measure.
- inflation reduces real interest rate, so cost of borrowing falls.
- a little inflation provides a cushion against perils of deflation. When prices falling economy can run into viscous cycle of underinvestment and reduced spending.
What are the effects of inflation on workers?
- inflation might mean that some workers expect high wages but firms don’t feel confident about paying higher costs.
- according to some economists, there’s a trade-off between wage inflation and unemployment. This mean that if there’s high wage inflation it’s easier for people to find work because firms are raising only because they cannot chose other workers at lower wages.
