2.1.1 Economic growth Flashcards
(46 cards)
Economic growth
the rate of change of output
Short run economic growth
The annual percentage change in Real National Output most commonly measured by Gross Domestic Product ( GDP )
Long run economic growth
The maximum potential output of the economy using all factor resources as illustrated on the Production Possibility Frontier .
Gross Domestic Product ( GDP )
measures the total value of all finished goods and services produced within one economy in one year . It estimates the size of and growth in the economy .
flow concept vs stock concepts
GDP is a flow concept as it calculates how much income was generated in a one year period . This could be compared to how much a person earns in a year . A stock concept is an accumulation of all the wealth a person or a country has . This could be compared to a person’s total savings and assets
Real vs. Nominal
Real values adjust for inflation and reflect changes in the quantity of goods and services produced. Nominal values are not adjusted for inflation.
Total vs. Per Capita
Total : Total values represent the aggregate sum of a variable for a given population or area .
Per Capita : Per capita values represent the average amount per person and are calculated by dividing the total by the population .
Value vs. Volume
Value : Value represents the monetary worth of goods and services produced . Volume : Volume measures the physical quantity of goods and services produced , disregarding their monetary value .
Nominal
- Gives monetary values for data - this is also known as money GDP
- This money ( or nominal ) data is not inflation adjusted
- Data for GDP is expressed at current prices ( today’s prices )
Real
Real data is adjusted for for the effects of price inflation
Prices are held at the level of a chosen base year
The GDP data is then expressed at constant prices
Converting Nominal GDP to Real GDP
In one year , an economy had a nominal GDP of £ 12 billion
During that year , inflation was 6 % .
Calculate the value of real GDP compared to the previous year
Real value in current year = ( Nominal value in current year / price index in current year ) * 100
Real value in current year = ( £ 12bn / 106 ) x 100
Real value in current year = £ 11.32 billion ( at constant prices )
Gross National Income ( GNI )
The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends.
This means that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home from the GDP. It is affected by profits from businesses owned overseas and remittances sent home by migrant workers. This is increasingly used rather than GDP because of the growing size of remittances and aid.
Remittances
money that is sent by a foreign worker back to their own country
Gross National Product ( GNP )
The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically ( GDP ) and overseas. This means it is the value of all the goods produced by citizens of a country, whether they live in the country or not, whilst GDP is the value of all goods produced inside the country, whether they were produced by citizens of the country or not.
Comparisons of rates of growth Over time
Changing national income levels will show us whether the country has grown or shrunk over a period of time:
- Examining growth rates over time reveals economic patterns and trends .
- Long - term analysis can identify periods of economic expansion , recession , or stagnation .
It is important to use real , per capita figures . If a country’s population grows over time , then this may cause a rise in GDP without a rise in living standards and so provide inaccurate comparisons . We use real GDP in order to strip out the effect of inflation . Inflation is rising prices and therefore can give the impression of GDP growing without any more services and goods being produced .
Comparisons of rates of growth Between countries
- When countries have a difference in population , a difference in total GDP doesn’t necessarily mean a difference in living standards so to make comparisons , we work out GDP per capita . It is possible for GDP to increase simply because of an increase in prices in the country and inflation is different in every country , so real GDP figures need to be calculated .
- They provide insight on the effectiveness of government policies.
Purchasing power parity ( PPP )
Purchasing power parity ( PPP ) is the idea that items should cost the same in different countries , based on the exchange rate at that 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 another currency .
How does PPPs help us compare living standards?
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 . In nations where the relative cost of living is low such as India , the real purchasing power of $ 1,000 will be higher and this leads to these countries seeing their PPP - adjusted per capita incomes rising in global league tables . They provide an alternative to using exchange rates for comparisons of GDP . These are useful when comparing countries as it takes into account the cost of living ( how much has to be spent to maintain living standards ) , and so will help us better compare living standards .
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 standardized size , composition and quality 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 .
How does the inaccuracy of data contribute to the limitations of GDP?
- Some countries lack efficient data collection and calculation, making comparisons less effective.
- A hidden market exists where people work without declaring income to avoid taxes or benefits, leading to underestimation of GDP. This varies widely between countries and may change over time. The UK’s informal economy is estimated to be 10.3% of GDP, representing approximately $358 billion (2023).
- GDP excludes home-produced services, such as subsistence farming, and DIY services in the UK.
- Inflation rate errors result in slightly inaccurate real GDP. Methods used to calculate GDP change over time, making comparisons difficult.
- Different countries use varying methods.
- Transfer payments, such as unemployment benefits and pocket money, are not included. Non-monetary transactions, like housework, are excluded.
- Negative externalities, like pollution caused by economic growth, are not considered.
What are the problems with comparing GDP between developing and developed countries?
Developing countries more often consume what they produce and don’t offer it for sale on the market . Therefore , it has no monetary value. Developed countries often increase incomes at the expense of quality of life . For example, stress , long working hours, and congestion when travelling. Developing countries might wish to achieve growth at the expense of health and safety.
What types of spending is a limitation of comparing GDP over time and between countries?
Some types of expenditure , such as defence , does not increase standard of living but will increase GDP . For example , the GDP of the UK was higher during the Second World War than in the 1930s because a lot of money was spent on defence which increased GDP but it is difficult to argue that standard of living was higher in the Second World War . This therefore makes comparisons difficult as spending varies over time and between countries .
How is the increasing quality of goods and services a limitation of comparing GDP over time?
The quality of goods and services is much higher than those fifty years ago , but this is not necessarily reflected in the real price of these goods and services . Therefore , living standards may have increased more than GDP would suggest since the quality of goods and services has improved greatly . Improved technology may allow prices to fall , suggesting falling living standards , when this is not the case .
What are the six key factors in the UN happiness report?
real GDP per capita , health , life expectancy , having someone to count on , perceived freedom to make life choices , freedom from corruption , and generosity .
