2.1.1 Economic Growth Flashcards
(20 cards)
What are the four macroeconomic objectives?
- Economic growth
- Low inflation
- Low unemployment
- A stable balance of payments
What is Gross Domestic Product (GDP)?
- GDP measures the total value of national output of goods and service produced in a given time period
- It estimates the size of and growth in the economy
- GDP counts the value of output produced within the geographical boundaries of a country
Why do we measure GDP?
- Compare economies: Can make comparisons over time and between countries
- Track growth: By measuring GDP over time, we can track economic growth or decline
- Forecast changes in the economy: Government, firms and economists use these forecasts to plan for the future e.g. governments and central banks use GDP to shape economic policies
- Standard of Living: Helps to estimate the standard of living by comparing GDP
How is GDP (expenditure) calculated?
GDP/AD = C + I + G + X - M
- Consumption (C)
- Government Spending (G)
- Investment spending (I)
- Changes in value of stocks
- Exports (X)
- Imports (M)
How is GDP (factor incomes) calculated?
- Incomes from wages and salaries
- Profits of private and public sector businesses
- Rental income from the ownership of land
(Transfer payments e.g. welfare payments/pensions are excluded from GDP)
How is GDP (value of output) calculated?
Value added from each of the main sectors
- Primary (farming, forestry & mining)
- Secondary (construction and manufacturing)
- Tertiary (tourism and healthcare)
- Quaternary (business consultancy)
What is Real GDP?
- It’s called “real” because it considers inflation, which can distort the value of goods and services produced in an economy over time
- Real GDP is adjusted for changes in prices, providing a more accurate measure of an economy’s actual growth
- Real GDP is usually expressed “at constant prices”
What is Nominal GDP?
- It measures the total value of all goods and services produced within a country’s borders during a specific time period, but it doesn’t account for the changes in prices that may occur during that time
- Nominal (money) GDP is expressed at current prices
- Nominal GDP in a given time period = Quantity of Goods and Services Produces x Current Prices
How do you convert Nominal GDP into Real GDP?
Real value in current year = (Nominal value in current year / price index in current year) x 100
What is GDP per capita?
- It measures the average economic output per person in a country
- It’s useful for understanding the average standard of living or income level within a given nation
- Per capita GDP allows you to compare the economic performance of different countries while considering their population sizes
GDP per capita = Total GDP / Population
What is the difference between the value of GDP and the volume of GDP?
- The value is the monetary worth
- The volume is the physical number
What is Gross National Income (GNI)?
- GNI is an alternative to GDP as a measure of wealth. It calculates income instead of output
- GNI = GDP + Net Primary Income + Net Secondary Income
- Net Primary Income: This includes wages, salaries and other income earned by a country’s residents working abroad, as well as earnings from foreign investments (dividend and interest)
- Net Secondary Income: This refers to transfers of money between countries e.g. remittances from foreign workers to their families in their home countries or international aid
How can you compare rates of growth between countries and over time?
National income statistics are useful for making comparisons between countries
- They provide insights on the effectiveness of government policies
- They allow judgements to be made about the relative wealth and standard of living within each country / It allows them to track economic growth or decline
- It provides a standardized way to assess changes in economic output, living standards, and productivity across different time periods
You can use Real GDP per capita as it takes population difference into account
You can use Real GNI per capita because it is more realistic for the analysing the income available per person
What is Purchasing Power Parity (PPP)?
- PPP is the idea that items should cost the same in different countries, based on the exchange rate at the time
- 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 currency
- In countries where the relative cost of living is high, there will be a downward adjustment to a nation’s PPP-adjusted GNI per capita
- In countries where the relative cost of living is low, there will be an increased adjustment to a nation’s PPP-adjusted GNI per capita
What is the Big Mac index?
- The Big Mac Index measures each currency against a common standard (the hamburger sold by McDonald’s all over the world) manufactured in a standardised size, composition and quality.
- PPP is calculated by comparing the price of a basket of comparable goods and services in different countries
- By converting the average national Big Mac prices to United States dollars, the same goods can be compared.
- This can tell us something about whether a currency is under or
overvalued in foreign exchange markets.
What are the limitations of using GDP to compare living standards
- GDP is purely a single measure of living standards, it only measures change in income. Health and education factors are also pivotal to living standards
- GDP only accounts for the quantity of output produced, it provides no information on the increase/decrease in the quality of goods/services over time. The poor quality may have actually decreased the standard of living
- GDP ignores the distribution of income and wealth / equality, increase in GDP may only benefit the elite or a small part of the population
- GDP does not consider differences in working hours, it doesn’t capture the amount of time taken to produce the GDP per capita.
- GDP does not include the value of non-marketed output and unpaid work such as family care and voluntary activities, this increases the standard of living
What is National happiness and Economic well-being?
- National happiness and societal well-being are measure in the UK by the Office for National Statistics (ONS)
- Economic well-being refers to the overall quality of life and material prosperity enjoyed by individuals and households, it includes income, consumption, access to basic needs and services, wealth accumulation, job security and overall life satisfaction
What is subjective happiness?
- Subjective happiness refers to self-reported levels of happiness with one’s life (determined using questionnaires)
- Measuring subjective happiness involves considering emotions, rather than material well-being
- Your personality and genetics, social influences, income & wealth and health affect your happiness
What is the relationship between real incomes and subjective happiness (The Easterlin Paradox)?
- The Easterlin Paradox concerns whether we are happier and more contented as our real living standards improve
- Richard Easterlin argued that lifee satisfaction does rise with average incomes but only up to a point
- Beyond that the marginal gain in happiness declines (there are diminishing returns)
What is the importance of using Purchasing Power Parity (PPP) between countries?
- Purchasing Power Parity (PPP) is important for comparing living standards and economic productivity between countries. - It adjusts for differences in price levels, allowing a more accurate comparison of what people can buy with their income in different countries
