2.1.1 Economic Growth

Question 1

Gross Domestic Product (GDP)

Answer 1

the total value of national output of g/s produced in a given time period within an economy

Question 2

Suggest two methods to work out GDP

Answer 2

1) Expenditure method: Consumer expenditure + Investment + Government spending + net trade (exports- imports)
2) Income method: adding up all the incomes within an economy (wages, interest, profits and rents)

Question 3

Suggest how the expenditure method and income method should have the same value

Answer 3

• Consumers earn money through working for firms (income), then spend this income on goods/services (Expenditure)
• If a firm’s revenue exceeds their costs then they will earn a profit (Income) which they then may spend to hire more employees or expand their business (expenditure)
• Income = Output = Expenditure.

Question 4

Nominal income

Answer 4

measures income at current prices with no adjustments for the effects of inflation
Increase in value of GDP

Question 5

Real income

Answer 5

measures income at current prices with adjustments for the effects of inflation
Increase in volume of GDP

Question 6

Inflation

Answer 6

• the ongoing increase in the average level of prices across the economy over a period of time (usually expressed as an annual rate)
• it means that the exchange (real) value of money is falling

Question 7

Does real GDP use nominal or real income?

Answer 7

Real GDP measures the volume of output (real income)

Question 8

Aggregate demand

Answer 8

the total amount of demand for all finished g/s produced

Question 9

Difference between price and cost

Answer 9

Price is what you pay and cost is how much is cost to produce the good

Question 10

What does increased output of GDP mean?

Answer 10

Aggregate demand has risen faster than the rate of inflation and therefore the economy is experiencing positive growth

Question 11

Nominal vs real income example

Answer 11

If the value of computer within the economy rose by 10% but the inflation rate was 4% then real GDP would be 6%

Question 12

Total GDP per capita

Answer 12

takes into account the difference in populations between countries

Question 13

Total GDP per capita formula

Answer 13

Total GDP/Population = Total GDP per capita

Question 14

Value vs volume of goods/services

Answer 14

• Value shows what certain goods/services are worth
• Volume shows the numbers of goods/service that are produced

Question 15

Why is it important to distinguish between value and volume?

Answer 15

• In trade, although a country may import more goods/services than they export, they could still have a trade surplus
• This is because the value of exports may still exceed the value of imports

Question 16

Gross National Product (GNP)

Answer 16

the total market value of all g/s produced by domestic residents (GDP) + income that residents have received from abroad

Question 17

Gross national income (GNI)

Answer 17

GDP (measures the total value of national output of goods and services produced in a given time period within an economy) + income paid into the country by other countries for such things as interest and dividends

Question 18

Difference between GDP and GDP per capita when comparing two countries

Answer 18

Comparing using GDP may be less valuable than comparing the GDP per capita since it allows for as easier comparison due to the fact that is take into account population differences

Question 19

Difference between nominal and real data when comparing two countries

Answer 19

Using real data makes a better comparison since a country with a high inflation rate is likely = a higher GDP growth rate.
- Although a consumer’s real income might not have risen it may differ in nominal.

Question 20

Economic growth

Answer 20

• an increase in production within the economy (important since our living standards are influenced by our access to goods and services)
• Without growth, individuals can only enjoy rising living standards at the expense of others in society
• More ppl producing= higher incomes

Question 21

Purchasing power party

Answer 21

PPP figures are adjusted for differences in the cost of living between countries and helps compare the costs of living between countries since it’s how much you can buy with your income
(E.g although US have a higher GDP per capita than UK, they will be worse off since they have a higher cost of living, meaning their wages can buy fewer items than in the UK)

Question 22

Higher PPP…

Answer 22

Higher PPP = better living standards since there’s a lower living ost

Question 23

Standard of living

Answer 23

refers to income, quality of life and economic welfare

Question 24

Problems with using GDP (GNP, GNI etc) to work out living standards

Answer 24

• does not include unofficial or unpaid work (childcare)
• It calculates what’s sold not produced (e.g blak market)
• Doesn’t take well being into account (stress levels, no hours worked, pollution)
• Equality: Increases in real GDP may not be shared equally among an economy’s population (a country might be producing a lot but it might go all to rich)
• Does’t work with comparisons since higher tax means a higher rate of black market
• Calculates the value of goods consumed by the produces rather than traded (particular issue in developing countries with higher levels of subsistence agriculture)

Question 25

National Happiness

Answer 25

Measuring national happiness rather than focusing on economic variable

Question 26

Nine domains in the Gross National Happiness Index

Answer 26

(Bhutan)
Psychological wealth
Health
Education
Time use
Cultural diversity and resilience
Good governance
Community vitality
Ecological diversity & resilience
Living standards

Question 27

Relationship between income and happiness

Answer 27

Higher income ≠ more happiness
(E.g hairdresser makes 10,174 and CEO makes 117,000 but their happiness is around the same at 7.417 and 7.957

Question 28

The Easterlin Paradox

Answer 28

• Economic growth doesn’t necessarily lead to more satisfaction
• The idea that happiness does rise with average incomes, but only up to a point.
• Beyond this, the marginal gains in happiness fall, perhaps because people care about relative as well as absolute incomes.

Question 29

Three juxtaposition of observations of the Easterlin Paradox

Answer 29

• Within a society, rich people tend to be much happier than poor people
• But, rich societies tend not to be happier than poor societies
• As countries get richer, they do not get happier

Question 30

Market liquidity

Answer 30

the extent to which an asset can b bought or solt at the current market price, without affecting its value

Question 31

Credit crunch

Answer 31

an economic state characterised mainly by a sharp drop in confidence and a lack of credit (or loans)

Question 32

Recession

Answer 32

a general decline in economic activity.

Question 33

Expenditure

Answer 33

the action of spending funds

Question 34

Surplus

Answer 34

the amount that remains when use or need is satisfied.

Question 35

Problems with neg economic growth

Answer 35

• Happiness might be more important. A healthy economy needs to take into account welfare.
• Example Venezuela

Question 36

Venezuela example

Answer 36

• has the highest inflation in the world, making food and medicine inaccessible
• high murder rate
• In 2004, oil price surge
• govt spent money on food subsidies, education and healthcare. The spending = growing deficit. This was unsustainable if oil prices fell.
• in 2014, oil prices plummeted
• exploited the currency system with setting the exchange rate at 10 bolivars per us dollar but only him and his allies had access to this.
• most Venezuelans get their dollars on the black market

Question 37

Why econ growth is not the most important?

Answer 37

World Happiness Report 2019, Finland as the happiest
- Categories help account for difference in life satisfaction around the world: GDP per capita, healthy life expectancy, freedom to make life choices, social support generosity, absence of corruption
- e.g Venezuela