MEASURES OF EC PERFORMANCE

• Economic growth


  The rate of change of output. An increase in the long term productive potential of the country which means there is an increase in the amount of goods and services that a country produces.
• Gross Domestic Product (GDP)


  The standard measure of output, which allows us to compare countries. It is the total value of goods and services produced in a country within a year.
• GDP


  • It is an indicator of the standard of living in a country
  • Total GDP represents the overall GDP for the country
  • GDP per capita is the total GDP divided by the number of people in a country
• Real GDP


  Strips out the effects of inflation
• Nominal GDP


  Does not strip out the effects of inflation
• Calculating nominal and real GDP


  • 2014: Nominal GDP = 800, Real GDP = 800

  2015: Nominal GDP = 1080, Real GDP = 880
• Gross National Income (GNI)


  The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends
• Gross National Product (GNP)


  The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically (GDP) and overseas
• Comparing economic growth over time


  • Use real, per capita figures to strip out the effects of inflation and population growth
  • Allows judgements about economic welfare and living standards
• Purchasing Power Parities (PPP)


  An exchange rate of one currency for another which compares how much a typical basket of goods in the country costs compared to one in another country
• Problems with using GDP to compare living standards


  • Inaccuracy of data

  Inequalities

  Quality of goods and services

  Comparing different currencies

  Spending on defence
• Inflation


  The general increase of prices in the economy which erodes the purchasing power of money
• Deflation

  The fall of prices and indicates a slowdown in the rate of growth of output in the economy
• Disinflation


  A reduction in the rate of inflation i.e. prices are still rising but they are not rising by as much
• Calculating inflation

  If inflation is 10%, £500 of goods in year 1 will cost £550 in year 2

  If inflation is 50%, £1000 of goods in year 2 will cost £666.67 in year 1
• Indices


  Nominal figures must be changed into real figures to make comparisons. This is done by choosing one year for the base year and adjusting all other figures into equivalent figures.
• Consumer Price Index (CPI)


  • The Office for National Statistics collects prices on 710 goods and services from 20,000 shops in 141 locations and online sites

  Prices are updated every month, with collectors visiting the same retailers to monitor identical goods

  New items are added to the list every year, whilst others are taken away

  Prices are combined using information on the average household spending pattern to produce an overall price index

  The average household spending is worked out through the Living Costs and Food Survey, where around 5,500 families keep diaries of what they spend over a fortnight

  Prices are weighted based on how much is spent on each item
• Limitations of CPI
• The Office for National Statistics (ONS) collects prices on 710 goods and services from 20,000 shops in 141 locations and online sites and the prices are updated every month, with collectors visiting the same retailers to monitor identical goods
• New items are added to the list every year, such as microwaveable rice and nail varnish, whilst others are taken away, including organic carrots
• Producing the overall price index


  Combine all the prices using information on the average household spending pattern
• Living Costs and Food Survey


  Where around 5,500 families keep diaries of what they spend over a fortnight
• Weighting


  Taking into account how much is spent on each item so they have a bigger impact on the overall rate of inflation if their price increases
• The CPI is not totally representative as it is impossible for the figure to take into account every single good that is sold in the country
• The CPI only measures an average rate of inflation, and is not totally representative as different households spend different amounts on each good
• The CPI does not include the price of housing and so, since this has tended to rise more than the price of other goods, the data may be lower than it should be
• It is difficult to make comparisons with historical data using CPI as it was only used since 1996 with estimates going back to 1988
• Some people argue that all inflation indices overestimate inflation because they don't take into account the fact that goods and services have improved in quality, and so will obviously be more expensive
• RPI


  Very similar to the CPI but includes housing costs such as mortgage and interest payments and council tax, whereas CPI does not
• CPI


  Takes into account the fact that when prices rise people will switch to product that has gone up by less, so it is generally lower than the RPI
• RPI excludes the top 4% of income earners and low income pensioners as they are not 'average' households, whilst CPI covers all households and all incomes
• RPI is no longer considered as the best method and has had its national statistic status removed, although the Office for National Statistics still calculates it every month
• Prices in a market are determined by demand and supply


  A shift in either will cause price to change
• An increase in aggregate demand (AD)


  Causes inflation to increase
• A decrease in aggregate supply


  Can push prices up
• Cost push inflation


  When businesses find their costs have risen, they will put up prices to maintain their profit margins
• Too much money in the economy

  Can cause inflation if there is no increase in the amount of goods and services supplied
• Inflation in Britain is higher than other countries


  British goods will be more expensive and less competitive, affecting the balance of payments
• Deflation


  Encourages people to postpone their purchases as they wait for the price to fall further, leading to a fall in demand for goods and a fall in firms' profit and business confidence
• Inflation/deflation/disinflation is difficult to predict and so this means that firms cannot plan for the future