2.3.1 - Measures of economic performance

Economic growth is the percentage increase in real GDP: the inflation-adjusted value of goods and services produced within an economy. $growth=(real\ GDP_t-real\ GDP_{t-1})/real\ GDP_{t-1}\times100$.

Growth can raise material living standards when it increases real output and real income per person, supporting consumption, employment and tax-funded services.

$GNI = GDP + net\ primary\ income\ from\ abroad$. Net primary income is residents' income received from overseas minus income paid overseas to non-residents.

For living-standard change, prefer real per-capita data: deflate nominal output and then divide by population. $GDP\ per\ capita=GDP/population$. Preserve units when moving between billions and millions.

Use the same measure, price basis, currency treatment and time interval. Compare percentage growth rates rather than raw changes when economies begin at different sizes, and distinguish a one-period movement from a sustained trend.

Purchasing Power Parity (PPP) converts incomes using the relative price of a comparable basket of goods and services. It asks how much currency is needed in each country to buy equivalent purchasing power.

PPP-adjusted real GDP or GNI reduces distortions from market exchange rates and different price levels, making international comparisons of material output or income more meaningful.

A positive rate that falls from 4% to 1% is slower growth, not contraction. A negative rate means the level of real GDP fell during that period.

In this syllabus, a recession is two consecutive quarters of negative real GDP growth. Both adjacent quarterly growth rates must be below zero.

A recession can reduce income, consumption, profits, investment and tax receipts while increasing unemployment and welfare spending. Its scale depends on depth, duration, policy response and affected sectors.

Use real per-capita PPP data and supporting social/environmental indicators, while recognising that measurement quality and national conditions differ.

Wellbeing indicators may include self-reported life satisfaction alongside health, education, employment, security, relationships, environment, leisure and material living standards.

Higher real income can raise subjective happiness by meeting needs, reducing financial insecurity and widening choices. The gain may weaken at higher incomes, and distribution, working conditions, health, freedom and environment can outweigh the income effect.

If inflation falls from 6% to 2%, prices are still rising and the price level is higher. Only a negative inflation rate indicates deflation.

Select a representative basket, measure household expenditure shares as weights, collect prices, set a base-year index (usually 100), and combine price relatives using the weights.

For weighted percentage changes: $inflation=\sum(weight\times percentage\ price\ change)/100$. Between index values: $inflation=(CPI_t-CPI_{t-1})/CPI_{t-1}\times100$.

With 80% spent on an item rising 25% and 20% on an item rising 20%, inflation is $(80\times25+20\times20)/100=24\%$.

Regularly update items and weights so new products and changed consumption patterns enter, while obsolete items leave. This improves representation but cannot remove household-specific differences.

A producer or wholesale price index measures changes in prices received by producers or paid for inputs at an earlier stage of production.

Rising input or factory-gate prices can increase firms' costs and later feed into consumer prices if firms pass them on. Falling producer prices may signal weaker future cost pressure.

Trace the initiating change through AD or SRAS and state conditions. Wage growth can be demand-pull through consumption and cost-push through labour costs; context decides which chain dominates.

Demand-deficient deflation is often damaging because output and employment fall. Supply-driven price falls can accompany higher real output and real income.

Impact depends on expected versus unexpected change, wage/indexation, cause, rate, duration, indebtedness, spare capacity and trading partners' inflation.

Under the ILO measure, an unemployed person is without work, has actively sought work in the previous four weeks and is available to start within the next two weeks. A labour-force survey identifies people meeting these conditions.

$unemployment\ rate=unemployed/labour\ force\times100$. The labour force is employed plus unemployed people, not the total population.

Identify the labour-market mechanism, not only the industry. A recession points to demand deficiency; technology can create structural unemployment when displaced workers cannot readily fill new jobs.

Long unemployment can erode human capital and employability, turning a cyclical loss into a more persistent structural problem.

A graduate in a job that does not require their skills may be skill-underemployed. A part-time worker wanting and available for more hours may be time-underemployed.

A lower unemployment rate can mean people found work, but it can also mean unemployed people became inactive. A higher employment rate is stronger evidence of increased use of labour, though population composition and underemployment still matter.

$net\ migration=immigration-emigration$. Positive net migration means more people arrive than leave.

The balance of payments records all transactions between residents and the rest of the world. Accounting entries balance overall once financial flows, reserves and errors/omissions are included.

$trade\ balance\ in\ goods\ and\ services=X-M$. A surplus is positive because exports exceed imports; a deficit is negative because imports exceed exports.

Calculate each period's balance first, preserving negative signs, then subtract the earlier balance from the later one. Moving from -$10bn to -$4bn is a $6bn improvement even though the balance remains in deficit.

$current\ account=trade\ in\ goods+trade\ in\ services+primary\ income+secondary\ income$. A positive total is a surplus; a negative total is a deficit.

A deficit means current-account outflows exceed inflows and must be matched by corresponding financial/capital entries and reserve or error adjustments. A surplus means current-account inflows exceed outflows.