(2.1) Measures of Economic 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 per capita


  The total GDP divided by the number of people in a country
• Real GDP


  GDP that strips out the effects of inflation
• Nominal GDP

  GDP that does not strip out the effects of inflation
• 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
• Making comparisons about growth


  1. Comparing over time

  2. Comparing between countries
• Purchasing Power Parities


  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 of using GDP to compare standard of living

  • Inaccuracy of data
  • Inequalities
  • Quality of goods and services
  • Comparing different currencies
  • Spending
  • Other factors
• National happiness


  GDP only measures income but there are other factors affecting welfare, including real GDP per capita, health, life expectancy, having someone to count on, perceived freedom to make life choices, freedom from corruption, and generosity
• UK national wellbeing


  Measured by self-reported health, relationship status and employment status, and 4 key questions about life satisfaction, anxiety, happiness and worthwhileness
• Easterlin Paradox


  Happiness and income are positively related at low incomes, but higher levels of income aren't associated with increases in happiness
• The report is now updated on a quarterly basis, rather than annually
• In 2012-2016, life satisfaction, happiness and worthwhile have continued to rise
• Anxiety levels fell but have begun to rise slightly
• Unemployment is falling/GDP is rising


  Concerns over global security could be causing anxiety
• Happiness and income


  Positively related at low incomes, but higher levels of income aren't associated with increases in happiness
• Easterlin Paradox


  Higher income doesn't necessarily make people happier
• Increase in consumption of material goods


  Increases happiness if basic needs aren't met, but once these needs are met, an increase in consumption won't increase long term happiness
• In the UK as we already enjoy a high standard of living


  Even if GDP doubles, happiness will not increase
• Income and happiness


  Depends on the people around us
• If you are the richest out of everyone you associate yourself with


  You will be happier than someone who has the exact same income but is the poorest out of everyone they associate with
• Income is linked to social status


  Higher social status tends to make us happier
• 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


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

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


  Nominal figures must be changed into real figures to make comparisons, by choosing one year for the base year and adjusting all other figures into equivalent figures
• The most well-known indices in Britain are the retail price index (RPI) and the consumer price index (CPI)
• Calculating index


  (new figure/base figure) x100
• 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 CPI list every year, such as microwaveable rice and nail varnish, whilst others are taken away, including organic carrots
• CPI


  All these 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
• Weighting in CPI


  It takes into account how much is spent on each item so they are weighted i.e. we spend more on petrol than on postage stamps so an increase in petrol will have a bigger impact on the overall rate of inflation
• 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 CPI but includes housing costs such as mortgage and interest payments and council tax, and excludes the top 4% of income earners and low income pensioners
• 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
• Demand pull inflation


  Caused by an increase in aggregate demand (AD), total demand for goods and services in the economy