GDP - Total amount/output of goods and services produced in a country in 1
year. = indicator of standard of living.
- Real GDP = Adjusted for inflation - effect of inflation removed.
- Nominal GDP = inflation not taken into account
Actual economic growth = Rise in real incomes and real GDP / output
Potential economic growth = Increase in productive capacity in a country.
EG : Increase in labour supply or productivity. = LRAS increases.
Recession = 2 quarters of negative economic growth
- Volume of output measures no. of goods produced. Value of output
measures no. of goods multiplied by price.
GNI = GDP plus the net income paid into the country from abroad.
PPP = An exchange rate of one currency to another which compares how
much a typical basket of goods in the country costs compared to one in
another country.
- It’s used to Compare countries' cost of living, so you can compare living
standards.
- Cost of living is high = PPP value of GDP would be low.
Limitations of using GDP to compare living standards between countries
- Differences in population = GDP/Capita more useful. Eg : India has a
high GDP but living standards very low.
- Bartering and hidden economy = goods may be traded without price
system. Also, goods may be paid without being declared to avoid tax.
Hidden economy is 7% in UK. Therefore, GDP is an underestimate as
these goods aren’t taken into account.
- Errors in calculating Inflation would affect real GDP. Also, some
countries are inefficient at collecting or calculating data.
- Inequalities = Growth in income of 1 group of people rather than
everyone, so may not increase living standards everywhere.
- Quality of goods and services = Quality is not reflected in GDP.
,National happiness = As incomes increase, happiness increases to a certain
level. When it exceeds that level, happiness starts to decrease.
- Subjective on the day and mood = unreliable.
Inflation = Sustained increase in the average price level= Target is 2% +/- 1%
- Disinflation = Fall in rate of Inflation
Deflation = Fall in the average price level.
Consumer Price Index (CPI) = Measure of inflation
- Calculated through a survey of basket of goods of 7000 households, but
excludes housing costs. It takes into account how much is spent on
each item, so it’s weighted. EG : Food is weighted the most.
Limitations of CPI
- Does not include housing costs, which is significant expenditure
- List of 700 items only changed once a year, so sudden changes in
spending patterns are not reflected in the CPI
- Sample of 7000 households, to which 50% of them responded.
Households may not give accurate information.
Retail Price Index (RPI) = Does include housing costs and mortgages. Also, it
excludes the top 4% of income earners and low income pensioners as they
are not average households.
- Not as reliable for international comparisons.
CAUSES OF INFLATION
- Demand-pull inflation = AD increases
- Cost-Push inflation = AS decreases as a result of increased production
costs, such as rise in wages or fall in exchange rates.
Monetarists believe increases in money supply causes inflation, due to AD
increasing.
, Effects of Inflation
Consumers
- People on fixed incomes, such as pensioners, means overall net
income would fall in real terms. They would have less purchasing
power.
- Savings = If rate of inflation is higher than interest rate, real value of
savings would fall
- Those with high levels of debt would benefit from inflation, as real value
of debt falls. Those who owed money lose out.
Firms
- Exports would be more expensive so less internationally competitive, so
there would be less exports leading to a trade deficit, and worsens
balance of payments.
- Inflation = higher costs = higher prices = lower demand = lower profit if
the PED is elastic.
- However, they can make more profit if price inelastic demand.
Government
- Inflation can make it more difficult for governments to reduce income
inequality, and can increase government spending through Welfare.
- Less internationally competitive due to export price rising, so can
worsen balance of payments and lead to trade deficit.
- Fall in value of national debt in real terms owned by the government =
less of a burden due to easier to repay it back.
Workers
- Living standards decrease if wages not above inflation level
- Less purchasing power
- Higher unemployment because firms would want to cut costs, so they
would hire less workers.
year. = indicator of standard of living.
- Real GDP = Adjusted for inflation - effect of inflation removed.
- Nominal GDP = inflation not taken into account
Actual economic growth = Rise in real incomes and real GDP / output
Potential economic growth = Increase in productive capacity in a country.
EG : Increase in labour supply or productivity. = LRAS increases.
Recession = 2 quarters of negative economic growth
- Volume of output measures no. of goods produced. Value of output
measures no. of goods multiplied by price.
GNI = GDP plus the net income paid into the country from abroad.
PPP = An exchange rate of one currency to another which compares how
much a typical basket of goods in the country costs compared to one in
another country.
- It’s used to Compare countries' cost of living, so you can compare living
standards.
- Cost of living is high = PPP value of GDP would be low.
Limitations of using GDP to compare living standards between countries
- Differences in population = GDP/Capita more useful. Eg : India has a
high GDP but living standards very low.
- Bartering and hidden economy = goods may be traded without price
system. Also, goods may be paid without being declared to avoid tax.
Hidden economy is 7% in UK. Therefore, GDP is an underestimate as
these goods aren’t taken into account.
- Errors in calculating Inflation would affect real GDP. Also, some
countries are inefficient at collecting or calculating data.
- Inequalities = Growth in income of 1 group of people rather than
everyone, so may not increase living standards everywhere.
- Quality of goods and services = Quality is not reflected in GDP.
,National happiness = As incomes increase, happiness increases to a certain
level. When it exceeds that level, happiness starts to decrease.
- Subjective on the day and mood = unreliable.
Inflation = Sustained increase in the average price level= Target is 2% +/- 1%
- Disinflation = Fall in rate of Inflation
Deflation = Fall in the average price level.
Consumer Price Index (CPI) = Measure of inflation
- Calculated through a survey of basket of goods of 7000 households, but
excludes housing costs. It takes into account how much is spent on
each item, so it’s weighted. EG : Food is weighted the most.
Limitations of CPI
- Does not include housing costs, which is significant expenditure
- List of 700 items only changed once a year, so sudden changes in
spending patterns are not reflected in the CPI
- Sample of 7000 households, to which 50% of them responded.
Households may not give accurate information.
Retail Price Index (RPI) = Does include housing costs and mortgages. Also, it
excludes the top 4% of income earners and low income pensioners as they
are not average households.
- Not as reliable for international comparisons.
CAUSES OF INFLATION
- Demand-pull inflation = AD increases
- Cost-Push inflation = AS decreases as a result of increased production
costs, such as rise in wages or fall in exchange rates.
Monetarists believe increases in money supply causes inflation, due to AD
increasing.
, Effects of Inflation
Consumers
- People on fixed incomes, such as pensioners, means overall net
income would fall in real terms. They would have less purchasing
power.
- Savings = If rate of inflation is higher than interest rate, real value of
savings would fall
- Those with high levels of debt would benefit from inflation, as real value
of debt falls. Those who owed money lose out.
Firms
- Exports would be more expensive so less internationally competitive, so
there would be less exports leading to a trade deficit, and worsens
balance of payments.
- Inflation = higher costs = higher prices = lower demand = lower profit if
the PED is elastic.
- However, they can make more profit if price inelastic demand.
Government
- Inflation can make it more difficult for governments to reduce income
inequality, and can increase government spending through Welfare.
- Less internationally competitive due to export price rising, so can
worsen balance of payments and lead to trade deficit.
- Fall in value of national debt in real terms owned by the government =
less of a burden due to easier to repay it back.
Workers
- Living standards decrease if wages not above inflation level
- Less purchasing power
- Higher unemployment because firms would want to cut costs, so they
would hire less workers.
