Economics: CPI and Balance of Payments

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Questions and Answers

What does the Consumer Price Index (CPI) represent?

The average cost of a shopping basket of an average household (correct)

The price of goods produced by a single manufacturer

The total cost of production in the economy

An index of the prices of luxury goods only

How is the inflation rate calculated using CPI?

CPI of year 1 / CPI of year 2

CPI of year 2 + CPI of year 1

CPI of year 2 / CPI of year 1

CPI of year 2 - CPI of year 1 (correct)

When South Africa's CPI increased from 125 to 130, what was the inflation rate?

4% (correct)

Which component is NOT part of the Balance of Payments (BOP)?

National Debt Signup and view all the answers

What do current accounts in the Balance of Payments record?

Exports and imports of goods and services Signup and view all the answers

What best describes direct investments within the financial accounts?

Gaining control or significant influence in a business Signup and view all the answers

What does inflation negatively affect?

The purchasing power of money Signup and view all the answers

Which of the following represents unrecorded transactions in the Balance of Payments?

Cash transactions not reported Signup and view all the answers

Which method of calculating GDP involves adding all spending on final goods and services?

Expenditure method Signup and view all the answers

What does GDP primarily measure?

Total value of final goods and services Signup and view all the answers

Which of the following is NOT included in the GDP calculations?

Intermediate goods Signup and view all the answers

Which formula represents the expenditure method of calculating GDP?

GDP = C + I + G + (X - Z) Signup and view all the answers

How is Net Domestic Product (NDP) calculated?

GDP - Depreciation Signup and view all the answers

What type of inputs includes wages and salaries in GDP calculations?

Primary inputs Signup and view all the answers

Which of the following reflects the potential social impact of unequal income distribution?

Social and political unrest Signup and view all the answers

Which set of prices can be used to measure GDP?

Market price, basic price, and factor cost Signup and view all the answers

What does the Lorenz curve illustrate?

The degree of inequality in income distribution Signup and view all the answers

How is the Gini Coefficient calculated?

By dividing the shaded area of the Lorenz curve by the area of the triangle OAB Signup and view all the answers

What does a Gini Coefficient of 0 represent?

A perfectly equal income distribution Signup and view all the answers

What is indicated by a higher Quantile ratio?

Greater income inequality Signup and view all the answers

Which measure is based on dividing the income of the top 20% by the bottom 20%?

Quantile ratio Signup and view all the answers

What does a Gini Coefficient of 1 (or 100) indicate?

Complete concentration of income among a single individual Signup and view all the answers

What is the significance of the diagonal line OB in the Lorenz curve?

It represents the perfect equality line Signup and view all the answers

In the context of measuring income inequality, what does a greater shaded area on the Lorenz curve suggest?

Increased inequality in income distribution Signup and view all the answers

Study Notes

Measuring Prices: Consumer Price Index (CPI)

The Consumer Price Index (CPI) measures changes in the price of a basket of consumer goods, representing the average household's spending.
CPI is used to calculate the inflation rate, which is the percentage change in prices over time.
Formula for calculating inflation rate: (CPI of year 2 - CPI of year 1) / CPI of year 1 * 100%
The CPI for the base year is always 100.
Example: If South Africa's CPI increased from 125 in 2022 to 130 in 2023, the inflation rate is (130 - 125) / 125 * 100% = 4%.

Measuring the Links with the Rest of the World: Balance of Payments (BOP)

The Balance of Payments (BOP) records a country's transactions with the rest of the world.
BOP comprises four components: current account, financial account, gold and other foreign reserves, and unrecorded transactions.
Current account records the value of exports and imports of goods and services.
Financial account records international transactions in assets and liabilities, including direct investments, portfolio investments, and other investments.
Direct investments involve controlling or having a significant influence in a foreign business through establishing a new business or acquiring shares.
Portfolio investments involve purchasing shares or bonds solely for financial returns.
Gold and other foreign reserves represent a country's gold production and foreign currency reserves held by the central bank.
Unrecorded transactions are entered to ensure the BOP balance.

Measuring the Level of Economic Activities: Gross Domestic Product (GDP)

GDP measures the total value of all final goods and services produced within a country's borders during a specific period.
GDP is calculated by adding the value of all final goods and services, using their respective prices.
Only the value of final goods is included in GDP to avoid double-counting.
Value of intermediate goods is not included.
GDP can be calculated using three methods: production, expenditure, and income.
Production method: Calculates the total value added at each stage of production.
Expenditure method: Adds up spending on all final goods and services, including consumption (C), investment (I), government spending (G), and net exports (X - Z): GDP = C + I + G + (X - Z).
Income method: Sums up all income earned by factors of production (FOP), including salaries and wages, rent, interest, and profits.
Transfer payments, such as grants and pensions, are excluded from GDP.
GDP is a gross figure, meaning depreciation (wear and tear on capital goods) is not accounted for.
Net Domestic Product (NDP): GDP - Depreciation, provides a more accurate measure of economic performance.

Measuring Inequality: Distribution of Income

Three measures of income distribution: Lorenz curve, Gini coefficient, and quantile ratio.
Lorenz curve: A graphical representation of income distribution, showing the cumulative percentage of income earned by each cumulative percentage of the population.
The diagonal line in the Lorenz curve represents perfect equality, while the further the curve deviates, the greater the inequality.
Gini coefficient: A numerical measure of inequality, calculated by dividing the area between the Lorenz curve and the diagonal line by the total area under the diagonal line.
A Gini coefficient of 0 indicates perfect equality, and 1 (or 100) represents perfect inequality.
Higher Gini coefficients indicate greater inequality.
Quantile ratio: Measures inequality by dividing the income of the top 20% of the population by the income of the bottom 20%.
A higher quantile ratio indicates greater inequality.

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Description

Explore key concepts in economics, focusing on the Consumer Price Index (CPI) and Balance of Payments (BOP). Understand how CPI measures inflation and how BOP records international financial transactions. This quiz will test your knowledge of these fundamental economic indicators.