Economic Growth 2.1.1
Created @October 30, 2023 6:12 PM
Tags
Economic Growth
Short Run: Increase in Real GDP
Long Run: Increase in Productive Capacity
GDP
GDP is a measure of the size of an economy:
Over a period of time
To compare the size of different economies
GDP - Total Value of final goods and services produced in an economy in one
financial year
Measured by three methods:
National Income (Income method)
Aggregate Demand (Expenditure method)
Aggregate Supply (Production method)
Real GDP
Real GDP - Total value of final goods and services produced in an economy in
one financial year at constant price level
Real GDP is nominal GDP adjusted for inflation
Real GDP = Nominal GDP * price level in previous year/price level in current
year
Economic Growth 2.1.1 1
, Real GDP per Capita - Real GDP/population level
RGDP per capita is a measure of average income
GNI (Gross National Income) = GDP + net income earned abroad
GNP (Gross National Product) = Value of all goods and services produced by
nationals
Limitations of GDP to measure Standard of Living:
Distribution of income
Composition of GDP (Military spending vs health and education spending)
Shadow economy (illegal/unrecorded transactions)
Non-marketed output (DIY, healthcare)
Negative externalities (pollution, congestion)
Non-financial factors (individual rights)
Economic Growth 2.1.1 2
, Inflation 2.1.2
Created @October 30, 2023 6:12 PM
Tags
Inflation, Disinflation, and Deflation:
Inflation - Sustained increase in general price level leading to a fall in
purchasing power of money
Inflation rate - % change in the price level measured over a period of time
Deflation - Fall in the price level measured over a period of time (Negative
inflation)
Disinflation - A fall in the rate of inflation (Positive inflation)
Hyperinflation:
Out-of-control price increases in an economy
Occurs when inflation rate exceeds 50% over a month
MPC (Monetary Policy Committee) from BOE (Bank of England) are
responsible for keeping inflation low and stable. Government set target of
keeping inflation at 2%
CPI:
CPI:
Base year is selected and a family expenditure survey is carried out
Representative basket of goods and services used by average UK households
chosen
Weights attached items based on importance in peoples expenditure
Weights are multiplied by price changes
Weighted price changes totalled to calculate inflation rate
Inflation 2.1.2 1
, Rate of inflation formula = (CPI new - CPI old)/CPI old
Limitations:
Does not include all products
Requires updates regularly as spending patterns change
Represents typical household, not specific consumers
No account for quality
CPIH:
Comprehensive measure of inflation
CPI extended to include housing costs
CPI is still useful for comparison internationally, as CPIH is not available for all
countries
Differences between CPIH/CPI and RPI:
1. Population base: CPIH and CPI cover more of the population than RPI
2. Item coverage: RPI includes certain aspects of housing costs not included in
CPI or CPIH, and there are no financial services in RPI
3. Index methodology: CPIH and CPI use geometric mean while RPI uses
arithmetic mean
4. Item coding: CPI and CPIH follow standard international classification, whilst
RPI is unique
Inflation 2.1.2 2
Created @October 30, 2023 6:12 PM
Tags
Economic Growth
Short Run: Increase in Real GDP
Long Run: Increase in Productive Capacity
GDP
GDP is a measure of the size of an economy:
Over a period of time
To compare the size of different economies
GDP - Total Value of final goods and services produced in an economy in one
financial year
Measured by three methods:
National Income (Income method)
Aggregate Demand (Expenditure method)
Aggregate Supply (Production method)
Real GDP
Real GDP - Total value of final goods and services produced in an economy in
one financial year at constant price level
Real GDP is nominal GDP adjusted for inflation
Real GDP = Nominal GDP * price level in previous year/price level in current
year
Economic Growth 2.1.1 1
, Real GDP per Capita - Real GDP/population level
RGDP per capita is a measure of average income
GNI (Gross National Income) = GDP + net income earned abroad
GNP (Gross National Product) = Value of all goods and services produced by
nationals
Limitations of GDP to measure Standard of Living:
Distribution of income
Composition of GDP (Military spending vs health and education spending)
Shadow economy (illegal/unrecorded transactions)
Non-marketed output (DIY, healthcare)
Negative externalities (pollution, congestion)
Non-financial factors (individual rights)
Economic Growth 2.1.1 2
, Inflation 2.1.2
Created @October 30, 2023 6:12 PM
Tags
Inflation, Disinflation, and Deflation:
Inflation - Sustained increase in general price level leading to a fall in
purchasing power of money
Inflation rate - % change in the price level measured over a period of time
Deflation - Fall in the price level measured over a period of time (Negative
inflation)
Disinflation - A fall in the rate of inflation (Positive inflation)
Hyperinflation:
Out-of-control price increases in an economy
Occurs when inflation rate exceeds 50% over a month
MPC (Monetary Policy Committee) from BOE (Bank of England) are
responsible for keeping inflation low and stable. Government set target of
keeping inflation at 2%
CPI:
CPI:
Base year is selected and a family expenditure survey is carried out
Representative basket of goods and services used by average UK households
chosen
Weights attached items based on importance in peoples expenditure
Weights are multiplied by price changes
Weighted price changes totalled to calculate inflation rate
Inflation 2.1.2 1
, Rate of inflation formula = (CPI new - CPI old)/CPI old
Limitations:
Does not include all products
Requires updates regularly as spending patterns change
Represents typical household, not specific consumers
No account for quality
CPIH:
Comprehensive measure of inflation
CPI extended to include housing costs
CPI is still useful for comparison internationally, as CPIH is not available for all
countries
Differences between CPIH/CPI and RPI:
1. Population base: CPIH and CPI cover more of the population than RPI
2. Item coverage: RPI includes certain aspects of housing costs not included in
CPI or CPIH, and there are no financial services in RPI
3. Index methodology: CPIH and CPI use geometric mean while RPI uses
arithmetic mean
4. Item coding: CPI and CPIH follow standard international classification, whilst
RPI is unique
Inflation 2.1.2 2
