Unit 2 Summary notes – Nikhil Pillai
Measurements of economic performance Economic growth
Two meaning of the term economic growth:
- Actual growth, increase in real incomes or GDP
- Potential growth, increase in the productive capacity in a country
Real values are adjusted to remove the effects of inflation. Nominal values are current incomes that are not adjusted
For GDP to have any significance in terms of standards of living; figures must be given per head (or per capita). E.g. If incomes increase by 10% but population increases by 20% people are worse off per head.
Important distinction, look at value not volume when measuring economic growth. E.g. Germany biggest exporter in the world in terms of value whereas china exports a lot more in terms of volume.
How is GDP measured?
GDP is the sum of all goods and services produced in a country in a year. It is also the sum of all incomes earner in a year and the sum of all expenditure in one country in a year.
Increase in GDP is a sign that a country is experiencing increasing incomes, outputs and spending. (Not always right, e.g. if you earn more you may work long hours, be under pressure, depression etc.)
Problems of comparison:
- Subsistence, barter and the black economy. Farmers consume their own output, goods traded without price system; goods paid for and not declared (to dodge tax)
Currency values. Knowing whether to use official value of currency or purchasing power of a currency Income distribution. -Size of public sector. If much of the spending in the economy is by government it might or might not improve welfare for the population.
Consumer and capital spending. Spending on investment goods may lead to increased standard of living in future at the price of standard of living today and GDP does not take future into account. Better if figures are broken down to look at the investment elements. -Quality issues. E.g. spending on schools may be high but how do we measure quality, are rising -Results enough to prove rises in standard of living. -
economy (because of increased supply of labour, investment or increased productivity). It can be used to show how an economy is preforming relative to its output capacity. Differences between the two are known as the output gap. (The difference between the actual output of an economy and the output it could achieve when it is most efficient or at full capacity) Inflation
Inflation is a sustained rise in general price level. General Price level measured using an index such as the CPI. Reason for using index is that percentage changes can be shown easily and it makes effective comparison possible. Of increase in productive possibilities is the rate of potential economic growth. Unit 2 Summary notes – Nikhil Pillai
Two surveys need to be undertaken:
- The expenditure and food survey. Collecting info from nearly 7,000 households. Self-reported diaries.
Used to calculate weighting of spending (e.g. 10% spent on food, 10% of money is for food)
- Price survey. Basket of goods. Collected once a month. Price changes multiplied by weighting to give
price index. Measure inflation = % change in index Target for CPI: 2 % +/- 1 %
CPI does not include housing costs, e.g. mortgages and rent. Therefore 2% interest may seem to be fine but people feel the effects on interest repayments.
An appropriate measure of wage increases is the retail price index (RPI). More inclusive than CPI.
Several problems with CPI measure:
- CPI does not include top and bottom 4% of income bracket
- Sampling problems. Only 57% of people return survey, may still be incorrect.
- 650 items in basket changed only once a year but tastes and fashion change quicker.
- People with a typical spending patterns. E.g. vegetarians, non-drivers CPI is unrepresentative
- When quality of goods changes measure breaks down. (It is no longer comparing like with like) e.g. if
you bought a more...
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