2.1 Measuring Economic performance

• Define the term 'Immobility of labour'

  The difficulty of workers to move from one location to another or one occupation to another
• What is the target of inflation?

  2%
• What does the Office National Statistics (ONS) do?

  Collect and publish statistics relating to the economy, population and society
• What does the world bank try to achieve?

  Tries to reduce poverty by lending money to poorer governments to improve their economy and standard of living
• What does GDP determine?

  Says how efficient an economy is using its resources
• What are the 4 sectors of the economy that purchase goods and services?

  1. Household CONUMPTION

  2. Business INVESTMENT

  3. GOVERNEMNT spending

  4. Foreign
• What are the macroeconomic goals?

  1. Stable prices
  2. Low unemployed
  3. High and sustained growth
• What are the measures of economic performance?

  • GDP growth
  • Unemployment
  • Inflation
  • Balance of payments
• What is economic growth?

  A measure of an increase in real GDP
• What is potential economic growth?

  A measure of the increase in productive capacity of an economy
• What is a recession?

  When an economy has two consecutive quarters of negative economic growth
• What are the effects if a county is in a recession?

  • Less spending, income and output
  • Likely to lead to the closure of firms
  • Lead to increased unemployment
  • Fall in living standards
• What is nominal GDP?

  Money value of all goods and services produced by a country
• What is real GDP?

  Nominal GDP adjusted to inflation
• What is GDP?

  The total amount of goods and services produced in an economy
• What is GDP per capita?

  GDP per person
• What is GNI?

  A measure that takes into account input/output from overseas on top of GDP
• What is the equation for GDP?

  GDP = Consumption + Investment + Government Spending + (Exports - Imports)
• What is the equation for real GDP?

  Real GDP = Nominal GDP (Price levels last year / Price levels this year)
• What is the equation for GDP per capita?

  GDP Per Capita = Total GDP / Population
• What is purchasing power parity?

  A technique used to compare prices and living standards between countries by adjusting prices / GDP into a common currency
• Why may prices vary?

  • Differences in per capita incomes
  • Minimum wage & commercial earns
  • Exchange rates
  • Differences in taxation
  • Different levels of competition
  • Impact of import tariffs
• What is the standard of living?

  Refers not only income but also the quality of life
• What is the quality of life?

  A measure of living standards that takes into account more than just income
• What are limitation of GDP to compare living standards?

  • Difference in population
  • Difference in rates of inflation
  • How much of the output is self-consumed
  • Difference in methods of calculations and reliability 
  • Type of government spending
  • Differences in income distribution
  • Differences in exchange rates
• What is national happiness?

  Measures the wellbeing of a country by looking at subjective criteria such as friendship or social interaction as well as real incomes 
• What is happiness?

  The satisfaction with how their life is going
• How can happiness be determined?

  • GDP per capita 
  • Healthy life expectancy
  • Freedom to make choices 
  • Social support
  • Generosity
  • Absence of corruption
• What is inflation?

  A general rise in prices
• What is disinflation?

  Prices rising at a slower rate than before
• What is deflation?

  Fall in prices
• What is CPI?

  A measure of inflation used for inflation targeting
• What is an index number?

  A number shown relative to another number in percentage terms
• What is the base year?

  Used to compare price level in different time periods
• What is the equation for percentage change?

  Percentage change  = (Change / Original) 100
• How is CPI calculated?

  • Basket includes 700 most commonly used goods
  • Weights are assigned to each item the average household buys which reflect the proportion of income spent on each item
  • Price changes are multiplied by weights to give a price index
• What are limitations to CPI?

  • Doesn’t include housing costs
  • Some people don't have representative spending patterns
  • Attempts are made to take account of changes in the quality or wight of good but these adjustments may be imprecise
  • List of 700 items are only changed once a year
  • There are sampling issues
• What is the retail price index?

  • Includes interest payments on mortgages 
  • Not as reliable as CPI
• What is demand pull inflation?

  • If aggregate demand increases faster than aggregate supply, the excess demand will cause prices to rise. 
• What causes demand pull inflation?

  • Lower interest rates 
  • Higher consumer confidence
  • Increase in government spending 
  • Exports rising relative to imports
  • Depreciation of the exchange rate