economic growth key terms

economic growth

An increase in the output (GDP) that an economy produces over a period, the minimum being two consecutive quarters.

GDP

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country during a specific time period (typically a year). or a quarter). It measures the economy’s total output. GDP can be shown in nominal or real terms.

Nominal GDP

The current dollar value of all goods and services produced in the economy in one year. This amount can increase, because either production or prices have risen. An increase in nominal GDP does not necessarily mean that output is increasing but prices may have increased.

Real GDP

The constant dollar value of all goods and services produced in the economy in one year. This amount has the impact of inflation removed, and therefore, rises only when production rises. Real GDP is adjusted for changes in the price level by removing the impact of inflation. An increase in real GDP means that actual output of goods and services is increasing.

Actual economic growth

An increase in real GDP. The economy is actually producing more goods and services.

Potential economic growth

An increase in the economy’s productive capacity, the maximum amount the economy can sustainably produce increases.

Converting nominal GDP to real GDP

real GDP = nominal GDP/GDP deflator x100

Net social welfare

It is a measure of growth that takes into account economic factors (GDP) and non economic factors (health, education).

Human development index (HDI)

A summary measure of average achievement in key dimensions of human development.

Real GDP benefits

1. It is adjusted for changes in price level

2. It shows if an economy is actually producing more goods and services

3. It allows for comparisons of a countries growth rate over time

Real GDP limitations

1. It does not take into account changes in a population

2. It does not take into account the composition of what is being produced

3. It ignores the income distribution

4. It ignores non - economic factors

5. It ignores informal sectors

6. GDP is backwards looking

Productivity capacity benefits

1. It looks forward

2. It helps to predict which economies will grow the fastest in the future

Productivity capacity limitations

1. It is hard to measure

2. It does not measure how much is actually being produced

Net Social Welfare benefits

1. Includes the distribution of wealth income

2. Includes factors like health, education, environment

3. Included non-market factors

Net Social Welfare limitations

1. Calculating NSW is difficult as it requires many factors

2. Different countries have different methods of calculating NSW

HDI Benefits

1. Combines social and economic data

2. Explains why countries with similar income levels have different qualities of life

HDI limitations

1. Doesn’t reflect short term changes

2. Doesn’t show how evenly incomes are distributed