2.1.1 Economic Growth (Edexcel)

Question 1

What is economic growth?

Answer 1

• Economic Growth is a sustained growth of real GDP over time
• Contributes to rising average living standards i.e. a higher per capita GDP/GNI
• Long run increase in a country’s productive potential / productive capacity

Question 2

What is GDP?

Answer 2

Gross domestic product (GDP) measures the total value of national output of goods & services produced in a given time period (usually a year or per quarter of a year).

Question 3

What are three ways of calculating GDP?

Answer 3

Expenditure, Factor Incomes, Value of output

Question 4

How do we calculate economic growth?

Answer 4

Economic growth is typically measured by calculating the percentage change in real GDP over a specific period, such as a year.

Question 5

What is real GDP?

Answer 5

Real GDP involves taking inflation into account – where money GDP is adjusted for changes in the price level
- we say that GDP is measured in constant prices. We can also say that this is a volume measurement.

Question 6

What is nominal GDP?

Answer 6

Nominal GDP is the monetary value of the national output of goods and services measured at current prices.
We can also say that this is a ‘value’ measurement.

Question 7

What is real disposable income?

Answer 7

income after deduction of taxes + benefits, & adjusted for the effects of inflation

Question 8

What is real GDP per capita?

Answer 8

real income per head of population expressed at constant prices.

Question 9

What is value?

Answer 9

Value represents the monetary worth of goods and services produced.

Question 10

What is volume?

Answer 10

Volume measures the physical quantity of goods and services produced, disregarding their monetary value.

Question 11

What is Gross National Income (GNI)?

Answer 11

• GNI is “GDP plus net property income from overseas”.
• Remittance money transfers are included in GNI and are important for some lower and middle-income
  countries.
• GNI per capita is used when calculating the income component of the Human Development Index (HDI).
• Countries with strong net inflows of remittances and other incomes (ceteris paribus) will see their GNI rise.

Question 12

What can cross country comparisons do e.g comparing growth rates?

Answer 12

Comparing growth rates between countries helps assess relative economic performance.
It can reveal disparities in development and highlight factors contributing to growth.

Question 13

What can examining long term trends in growth rates do?

Answer 13

Examining growth rates over time reveals economic patterns and trends.
Long-term analysis can identify periods of economic expansion, recession, or stagnation.

Question 14

What are Purchasing Power Parities (PPPs)?

Answer 14

• PPP measures how many units of one country’s currency are needed to buy the same basket of goods and
  services as can be bought with a given amount of another currency.
• In countries where the relative cost of living is high such as Norway and Switzerland, there will be a downward
  adjustment to a nation’s PPP-adjusted GNI per capita.

Question 15

What is an example of PPP?

Answer 15

For example, if someone earns $20 000 in the US and another person earns $20 000 in a less-developed
country, the person in the less-developed country will be able to buy more goods and services with their
income, even though income is the same. This is because goods and services are likely to be much cheaper
in the less-developed country.

Question 16

Explain how GDP can house inaccurate data due to the shadow economy

Answer 16

1. GDP tends to understate real national income per capita due to the shadow economy and also the value of
   unpaid work done by volunteers and people caring for their family.
2. The shadow economy includes illegal activities such as drug production and distribution, prostitution, theft,
   fraud and concealed legal activities such as tax evasion on otherwise-legitimate business activities such as
   non-reported self-employment income
3. The UK government estimated the hidden economy “tax gap” at £3.5 billion in 2015-16
4. In 2014 the UK started to include estimates of incomes and spending from the shadow economy in their GDP

Question 17

Explain what well-being is.

Answer 17

Well-being is now a statistic collected by the ONS, that considers the personal life satisfaction / anxiety / stress of
citizens.

Question 18

What is the relationship Between Real Incomes and Subjective Happiness?

Answer 18

Subjective happiness refers to ‘self-reported’ levels of happiness with one’s life, usually determined using
questionnaires. Measuring subjective happiness usually involves considering emotions, rather than asking about
material well-being (i.e. possessions, income, health etc.). Factors that tend to affect your happiness include: your
personality and genetics, social influences (e.g. friends), income and wealth (to a smaller degree than you might expect!), health, and leisure time. Typically, people believe that more money will make them happier than it actually does. This view has been partly formalised into the Easterlin Paradox.

Question 19

How is GDP measured in terms of expenditure?

Answer 19

Question 20

How is GDP measured in terms of factor incomes?

Answer 20

Question 21

How is GDP measured in terms of value of output?

Answer 21

Question 22

What is value added?

Answer 22

Value added is the increase in market value of goods or services during each stage of production or supply.

Question 23

List the lower value added industries

Answer 23

Question 24

List the higher value added industries

Answer 24

Question 25

What is manufacturing?

Answer 25

Manufacturing is a process of producing goods in factories.
In 2018, manufacturing contributed 10 percent of UK GDP and 8 percent of all jobs.

Question 26

How much manufacturing goes on in the UK compared to other countries?

Answer 26

• Manufacturing in the UK has been declining for several decades – this is known as de-industrialisation.
• In other countries such as China, South Korea, Mexico and Germany, manufacturing industries account for a
  significantly higher percentage of their countries’ national income.

Question 27

What are services?

Answer 27

Services are part of the tertiary sector.
Examples include business services such as accountancy, health care, education and tourism.

Question 28

What is short run economic growth?

Answer 28

Short run economic growth is the increase in the real value of goods and services produced and is measured by the
annual percentage change in real Gross Domestic Product (GDP).

Question 29

What is long run economic growth?

Answer 29

Long run economic growth is an increase in a country’s productive capacity / potential output

Question 30

How can you convert nominal GDP into real GDP?

Answer 30

(Nominal GDP x 100/price index)

Question 31

What are the key benefits of using real GDP when assessing changes in living standards?

Answer 31

1. Easy to make comparisons over time (the rate of economic growth)
2. Easy to compare different countries e.g. high and low growth countries
3. It correlates with other measures of living standards including the Human Development Index
4. Having a higher income generally correlates with being able to buy more goods and services (which can
   include things such as education and healthcare and better housing).

Question 32

What are strategies of improving living standards?

Answer 32

Question 33

What are the aspects published GNI data hides?

Answer 33

1. Scale and depth of household / regional inequalities of income & wealth
2. Changes in leisure & working hours and overall working conditions – affecting work-life balance
3. Gross Domestic Product makes no allowance for depreciation of capital machinery & technologies
4. Valuation of changes in years of people’s healthy life expectancy
5. Value of non-market output and unpaid work e.g. voluntary care
6. Innovation and improvements in the quality of products we consume including public services
7. Impact of GDP growth on the sustainable stock of our natural resources

Question 34

What is economic welfare?

Answer 34

o A broader measure of well-being (i.e. social + economic factors are considered)
o Many aspects of well-being are not directly linked to material aspects of life
o Welfare measure might include changing levels of inequality + median household incomes

Question 35

What is median income?

Answer 35

Median income is the income of the middle household if all are ranked from lowest income to the highest. It is generally regarded as a ‘better’ measure of average income than calculating the mean, because means can easily be affected by ‘outliers’ i.e. a small number of very rich households could ‘pull up’ the mean, making GDP per capita too high as a statistic to reflect average earnings.

Question 36

What is household disposable income?

Answer 36

A household’s disposable income is made up of all its earnings and investment income (including private
pensions), plus cash benefits received from the state, minus direct taxes such as Income Tax and Council Tax.

Question 37

Explain the Easterlin paradox.

Answer 37

• The Easterlin Paradox is associated with US economist, Richard Easterlin
• It concerns whether we are happier and more contented as our real living standards improve
• Within a society, richer people tend to be happier than poor people.
• Richer societies tend not to be happier than poor societies (or not by much).
• As countries get richer, they do not inevitably get happier.