2.1.1 Economic growth

Here are the spec points

What is economic growth?

• refers to the increase in a country’s real GDP over time.

• it signifies an expansion of an economy’s production capacity and is a key indicator of its overall economic health.

How is economic growth usually measured? what is the formula?

• By calculating the percentage change in real GDP over a specific period of time, such as a year.

• It can also be shown through the shift of a PPF

What is the formula for growth rate?

Growth rate = [(GDP at Time 2 - GDP at time 1)/GDP at time 1] x 100

What Gross Domestic Product?

the standard measure of output, which allows us to compare countries. It is the total value of goods and services produced in a country within a year.

What is GDP an indicator of?

standard of living in a country

What is the difference between total GDP and GDP per capita?

Total GDP represents the overall GDP for the country whilst the GDP per capital is the total GDP divided by the number of people in the country

What is Real values?

Real GDP is the measure of economic growth adjusted for inflation and reflects changes in the quantity of goods and services produced

• so real GDP ignore the effect of inflation

What are nominal values?

Nominal values do not adjust for inflation and represent current market prices.

Compare real and nominal values

real values are adjusted for inflation and reflect changes in quantity of goods and services produced whereas nominal values do not adjust for inflation and represent current market prices

Describe the difference between Real and Nominal using volume and

real values can be described as the volume of national income i.e the size of the basket of goods, whilst nominal values represents the value of national income i.e. the monetary cost of this basket of goods.

Define value (in oppose to volume)

value represents the monetary worth of goods and services produced

Define volume (in oppose to value)

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

What is the difference between value and volume?

Value represents the monetary worth of good and services produced. Whereas volume represents the physical quantity of goods and services produced, disregarding their monetary value

What is the equation which relates the value and volume?

Value = volume x current price

What is the difference between total and per capita?

total values represent the aggregate sum of a variable for a given population or area. Whereas per capita values represents the average amount per person and are calculated by dividing the total by the number of the population.

define the value of national income

it is the monetary value at the prices of the day

define the volume of national income

the volume of national income adjusted for inflation and is expressed either as an index number or in money terms.

Example question:

Using 2014 as a base year for prices, work out nominal and real GDP:

value of national income = volume x current price level

Nominal GDP = price x quantity for each year:

Nominal GDP for fish

• for 2014 = 4 × 100 = 400

• for 2015 = 5×120 = 600

Nominal GDP for chips

• for 2014= 1 × 400= 400

• for 2015= 5 × 120= 600

Real GDP = quantity x price

Real GDP for fish

• for 2014 = 4 × 100= 400

• for 2015 = 4 × 120= 480 (real fish in 2015 - so ignores inflation therefore price stays at £4 when calculating)

Real GDP for chips

• for 2014= 1 × 400= 400

• for 2015= 1 × 400 = 400

Give 2 other national income measures

• Gross National Income (GNI)

• Gross National Product (GNP)

Define GNI (Gross national income)

• the total income earned by a country’s residents and businesses, both domestically and abroad.

• it is a broader measure than GDP and considers income earned from overseas investment and remittances.

value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends.

This means that nit adds what a country earns from overseas investment and subtracts what foreigners earn in country and send back home from GDP. It is affected by profits from businesses owned overseas and remittances sent home by migrant workers. This increasingly used rather than GDP because of the growing size remittances and aid.

Define GDP (Gross domestic product)

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 goods produced by citizens of a country, whether they live in the country or not, whilst GDP is the value of citizens of the country or not.

What will changing national income levels show?

Changing national income levels will show us whether the country has grown or shrunk over a period of time.

What are the main uses of growth indexes?

• the data is compared to other countries to put figures in a context. Growth figures over a set period of time can be compared against similar countries to see whether a country has done well or not.

• figures can also make judgements about economic welfare as growth in national income means a rise in living standards as the economy is producing more goods and services so people have access to more things.

Why is it important to use both 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, and therefore can give the impression of GDP growing without any more services and goods being produced

Define inflation

rising prices

Describe what is meant by cross- country comparisons

• comparing growth rate between countries helps asses relative economic performance

• it can reveal disparities in development and highlo9ght factors contributing to growth

Describe what is meant by long term trends

• examining growth rates over time reveals economic patterns and trends

• long term analysis can identify periods of economic expansion, recession or stagnation.

What are purchasing power parities (PPP)s?

• Purchasing power parities (PPPs) are exchange rates that equalise the purchasing power of different currencies for a common basket of goods/

• They account for price differences between countries and facilitate meaningful international comparisons

For example: if the exchange rate suggests that 1 USD equals 100 Japanese yen, but the PPP-adjusted exchange rate is 1 USD equals 110 yen, it means that the yen has greater purchasing power in Japan

Give 3 limitations of using GDP to compare standards of living

1. Income distribution: GDP per capital does not accounts for income inequality, and a high GDP may conceal disparities in living standards.

2. Non-market Activities: GDP excludes non-market activities like household labour and informal economies, leading to an incomplete picture of living standards.

3. Quality of life: GDP does not measure factors such as healthcare, education, environmental quality, and overall well-being

What is National Happiness?

talks about the UK National wellbeing and relationships between Real Income and subjective Happiness

UK National Happiness

• some countries, including the UK, have explored measures of national well-being to complement GDP.

• These measures consider factors like satisfaction, mental health, and social connections

What is the relationship between real incomes and subjective happiness?

• Research suggests that while higher incomes are associated with increased happiness up to a point, the relationship between income and happiness diminishes beyond a certain income level.

For example: The world Happiness Report ranks countries based on factors like income, social support, life expectancy, freedom to make life choices, trust and generosity.