(Theme 2 - Economic growth) A Level Edexcel Economics

Nominal GDP

The total value of G/S produced in the economy, equal to C + I + G + (X-M)

Real GDP

The total value of G/S produced in the economy adjusted for inflation.

It is used as an indicator of economic growth.

It is equal to (nominal GDP/price index or deflator) x 100

GNP

The total value of G/S produced by individuals and firms of a certain nationality.

GNI

The total value of G/S produced alongside income paid into the economy by other countries for financial investment

It is equal to nominal GDP + net income from abroad

GDP per capita

Real GDP divided by population size used to give an indication of average income per person AND living standards by country

Real GDP growth

Percentage change of real GDP over time measured by

([GDP of this year - GDP of last year)/ GDP of last year ] x 100

GNH

A measure used to quantify the total happiness and wellbeing of a country, usually through surveys

PPP

An exchange rate used to equalise the purchasing power of different countries for a common basket of goods.

It is equal to the sum of G/S produced in a year in USD

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

Economic growth index

A measurement of the rate of change of GDP adjusted for inflation

(Real GDP of this year/base index) x 100

GNP or GDP

GNP focuses on the value of G/S produced by citizens of a country, no matter where they are located. Whereas GDP measures the total value of G/S produced within a country's borders, regardless of who produced them.

both are used to measure national income.

Some countries may have a higher GNP than GDP if

most of their citizens work and earn abroad

A large country may have a smaller GDP per capita than a smaller one if

most of their population is poor

Why values are adjusted for inflation

to reflect true increases in output

Nominal GDP may rise as a result of inflation but output will stay the same. This gives the effect that there has been economic growth when there actually hasn’t been any. Therefore, nominal GDP must be adjusted for inflation to reflect true increases in output.

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If nominal GDP rose by 55% and inflation at 15%, there was only ____% growth as a result of extra production.

40

The importance of comparing rates of growth between countries (3)

1. Reveal disparities in development and highlight factors contributing to growth.

2. Reveal economic patterns and trends

3. Long-term analysis can identify periods of boom, recession, or stagnation

How PPP for GDP works

Find what each item purchased in a country would cost if it were sold in the US. Those costs are then added up for the total G/S produced in that country in a year.

Limitations of GDP as a measure of economic growth (4)

1. Does not account for non-market activities e.g. chores or money flowing around the informal sector e.g. caregiving services of immigrant workers

2. Does not reflect the distribution of wealth e.g. income inequality and poverty across the population, which affect living standards

3. Does not reflect the environmental damage as a consequence of production

4. It does not reflect quality of life or national wellbeing of the population

GDP or GNH (AD GNH)

1. Offers a holistic view of the economy - factors wellbeing, quality of life, the environment.

2. Helps policy makers identify priorities and areas where progress is lacking

GDP or GNH (DIS GNH)

1. No universal standard for GNH, so difficult to compare progress between different countries

2. Hard to implement in many countries as not all value spirituality as much as Bhutan (the only economy that relies on GNH)

3. Happiness is subjective and heavily based on mood, not necessarily living standards

UK Measuring National Wellbeing Report

A means of indicating how lives are improving. It asks 4 key questions about life satisfaction, worthwhileness, anxiety and happiness

The relationship between income and subjective happiness

A. Positive up to a certain income level. This is mainly true for lower-income households with high MPC when disposable income rise since they struggle to meet basic needs. This is not the case for countries with high standards of living compared to the rest e.g. the UK

B. Subjective happiness is linked to social status. You will feel happier with your income if you are surrounded by people earning lower, than with the same level of income but around people earning higher.

Positive impacts of economic growth

1. Employment

2. Profit

3. Tax revenue

4. Living standards

Negative impacts of economic growth

1. Inflation

2. Trade

3. The environment

4. Inequality

The inequality of income and wealth

When there is a rise in real GDP, those who are already rich tend to do better tan those who were not due to the expansion of their previous wealth e.g. company owners receive more profit, and higher skilled workers receive more wage rises.

Evaluation of inequality

Bad - resources should be distributed evenly for the greater good of society (command economists) --> BUT leads to the suppression of individual freedom and lack of competition/motivation

Good - people should earn based on their contributions to society (free market economists) --> BUT leads to revolution where poor workers overthrow rich owners

Actual economic growth

An increase in the current level of national income; MORE production and national income than before

Shown by shifts in SRAS and changes to GDP growth rates

Potential economic growth

A rise in an economy's production possibility; more POTENTIAL production than before

Shown by shifts in LRAS

Why SRAS is not a reliable measure of economic growth

It is heavily affected by supply-side shocks e.g. changes in oil prices, so is very volatile. Use AD instead.

How international trade allows for export-led growth

Countries are able to specialise in industries where they have a comparative advantage, and earn GDP through selling overseas (or locally if the economy is strong enough)

Benefits of international trade for export-led growth

In the short term, AD will increase as export spending increases but it will increase again in the long term as firms overseas begin to invest in the (supply-side of) economy

A drawback of of international trade for export-led growth

If a country is heavily reliant on an export industry for income, changes to the state of other countries' economies/recession in export markets/global recession will result in a fall in exports and economic growth