1. How do we measure economic performance?
Microeconomics Topic 1: The Economic Problem
How do we measure economic performance?

2. Remember this? 1.1.1 Introduction
Economics is the study of choice and decision making in a world with limited resources.
Economics is usually divided into two parts: microeconomics and macroeconomics.
Macroeconomics examines the economy as a whole whereas microeconomics examines individual consumers, firms and markets in the economy.

3. Microeconomics Topic 1: The Economic Problem
2.1 Unit content
Four topics:
2.1.1 Economic growth (see topic 2.5)
2.1.2 Inflation
2.1.3 Employment and unemployment
2.1.4 Balance of payments

4. 2.1.1 Economic growth - syllabus
Microeconomics Topic 1: The Economic Problem
2.1.1 Economic growth - syllabus
Students should be able to:
Explain the rates of change of real GDP as a measure of economic growth
Distinguish between real & nominal; total & per capita; value & volume
Define other national income measures (GNI)
Compare rates of growth between countries and over time
Analyze and use PPPs and PPP adjusted figures
Assess the limitations of using GDP
Discuss national happiness

5. Macroeconomics definitions
Macroeconomics considers the economy as a whole – the total quantities of goods and services produced by all firms in the economy
Total demand is called a_________ d_________ and total supply is a____________ supply
World’s largest economies v 2015 v 2020

6. Macroeconomic measurements
The main methods of measuring national economic performance are
Economic growth including measures of national happiness
Employment (or unemployment) – see 2.1.2
Inflation – see 2.1.3
Balance of payments – see 2.1.4

7. Developed countries
Developed countries are _________________ countries (also known as first world countries).
E.g.

8. Microeconomics Topic 1: The Economic Problem
Developing countries
Developing countries are defined according to their Gross National Income (GNI) per capita per year. Usually they have a GNI of below US$
Most are situated in the southern hemisphere. They were sometimes called third world countries.
E.g.
A developing country is one in which the majority lives on far less money, with far fewer basic public services, than the population in highly industrialized countries

9. Economic growth – simple definition and calculation
Microeconomics Topic 1: The Economic Problem
Economic growth – simple definition and calculation
Economic growth refers to the capacity of an economy to produce more over time
What will happen to the size of a very small economy which is currently worth £1000 if it grows by 2.5% a year?
If it continues to grow by 2.5% for a second year?

10. Economic growth – more calculations
Microeconomics Topic 1: The Economic Problem
Economic growth – more calculations
What will happen to the size of the small £1000 economy if it grows by 2.5% a year for 30 years?
When will it double?

11. Economic growth and GDP
Microeconomics Topic 1: The Economic Problem
Economic growth and GDP
Economic growth is measured by the rate of change of GDP (gross domestic product).
GDP is the total value of g_______ and s_______ produced in the economy.
This is a standard United Nations measure.
E.g. growth of 2.5% in GDP in a year means that the output of the economy has ____________ by _____ over _____ months.
Economic growth can also be measured by the annual change in real national income.

12. Reliability of GDP figures
Microeconomics Topic 1: The Economic Problem
Reliability of GDP figures
The figures are based on a huge survey of businesses and government departments complied by the ONS.
The first figures for any quarter are known as the "flash estimate" as they are based on incomplete data. The figures are revised at least twice as more information is collected
NOTE: an economy is generally considered to be in recession if it has contracted for _____ consecutive quarters

13. Microeconomics Topic 1: The Economic Problem
Exam question: why are GDP figures revised? Try and answer without looking at your previous slides!
June 2013

14. Edexcel definitions of GDP, GNI and GNP
GDP is the total market value of all _________and services produced in the country in a given year. GDP does not include ______________ by its residents while outside of the country.
GNI is GDP plus _________ paid into the country by other countries for such things as _________ and dividends.
earnings, goods, income, interest
So, if a UK company owns a factory abroad, will that factory’s output count towards UK GNI or UK GDP?

15. Economic growth
GDP is measured as a percentage and the trend rate for the UK is ____% per year
The underlying long term trend rate of economic growth just means the rate that can be maintained in the long term
The latest figures are that the UK economy grew by ___% in the 1st quarter of 2017 (January to March).
This is the _________ the previous quarter and ____________ the estimate of 0.3%.

16. Nominal and real economic growth
What is the difference between nominal and real GDP?
Real figures are figures adjusted for ________ whereas nominal figures are figures not adjusted for __________
If the nominal GDP growth rate was 10% last year and inflation was 7% then the percentage change in real GDP would be ____%

17. Total versus per capita GDP
What is the difference between total and per capita GDP?
Total GDP is
Per capita GDP is
If the nominal GDP growth rate was 10% last year, inflation was 7% and population growth was 3% then the approximate percentage change in real GDP per capita would be

18. Volume versus value GDP
What is the difference between volume and value GDP?
Volume GDP is the total ________ produced in an economy
Value GDP is calculated by:

19. If an economy is shrinking then its GDP would be?
Falling GDP?
What does it mean if an economy was growing by 10% and its growth rate had now fallen to 2%?
If an economy is shrinking then its GDP would be?

20. Why is economic growth inadequate as a measure of standard of living?

21. Microeconomics Topic 1: The Economic Problem
What are the problems of comparing GDP between developed and developing countries?
Reasons as on previous slide plus:

22. Comparing GDP across countries
Microeconomics Topic 1: The Economic Problem
Comparing GDP across countries
GDP for different countries is usually measured in a common currency – normally the US dollar. But there are two problems in using exchange rates:
Exchange rates can be volatile from month to month. A large depreciation in the value of the Argentinean peso against the US dollar might imply that Argentinean living standards have fallen even though their economy might actually be ________ quickly

23. Comparing GDP across countries
Microeconomics Topic 1: The Economic Problem
Comparing GDP across countries
The second problem is:
Exchange rates are more relevant to products that are traded between countries rather than non-traded products, why?
Non-traded service such as domestic cleaners, haircuts and academic tutors tend to have bigger differences in prices.

24. Microeconomics Topic 1: The Economic Problem
What are PPPs?
Purchasing power parities try to compare the value of money in different countries
To make a PPP adjustment for comparing GDP we build a basket of comparable goods and services and look at the prices of that basket in different countries. Purchasing Power Parity is the exchange rate needed for say $100 to buy the same quantity of products in each country.
PPP figures are adjusted for differences in the cost of living between countries.

25. Microeconomics Topic 1: The Economic Problem
Edexcel comments
The standard of living does not just refer to income but also to the q______ of l______ and e__________ w__________

26. Microeconomics Topic 1: The Economic Problem
National happiness
In response to these issues, there has been a move towards measuring National Happiness, rather than just focusing on economic variables. In the UK, the ONS measures National Well-being. Within the area of happiness economics there has been much debate about the 'Easterlin paradox', what is this?

27. National happiness and income
Microeconomics Topic 1: The Economic Problem
National happiness and income
There is evidence to suggest a positive correlation between relative income and happiness.
Those with above average incomes tend to have higher levels of happiness. Why?