2.1.1 Economic growth

What is economic growth?

Economic growth= increase in a country’s real GDP over time

What are the economic measures?

Economic measures

• real values vs nominal values

• total values vs per capita values

• value vs volume

What are real values?

Real values= real values adjust for inflation & reflect changes in quantity of goods and services produced: can be described as the volume of national income i.e. the size of the basket of goods

What are nominal values?

Nominal values = nominal values DON’T adjust for inflation & represent current market prices: value of national income : calculated by the price x quantity

What are total values?

Total values= total values represent aggregate sum of a variable for a given population or area

What are per capita values?

Per capita values= per capita values represent average amount per person, by dividing total by population

What does value represent?

Value represents monetary worth of goods and services produced

What does volume measure?

Volume measures physical quantity of goods and services produced, no monetary value

What are the 2 types of comparison of rates of growth?

2 types of comparisons of rates of growth:

1. Cross- country comparisons

2. long-term trends

What are cross-country comparisons?

Cross- country comparisons=

• comparing growth rates- help assess relative economic performance

• reveal disparities (differences or inequalities in economic outcomes, i.e., income) and factors contributing to growth

What are long-term trends?

Long- term trends=

• growth rates over time- reveal economic patterns & trends

• identify expansion (boom), recession or stagnation (stops growing)

What are Purchasing Power Parities (PPPs)?

PPPs are exchange rates that equalize purchasing power (quantity of goods and services a unit of currency can buy) of different currencies

What does purchasing power mean?

Purchasing power = quantity of goods and services a unit of currency can buy

What are the 3 limitations of using GDP?

3 limitations of using GDP?

1. income distribution

2. non-market activities

3. quality of life

Why is income distribution a limitation of using GDP?

Income distribution is a limitation of using GDP as GDP does not account for income inequality

Why is non-market economies a limitation of using GDP?

Non-market economies is a limit of using GDP as GDP excludes non-market economies like household labour. For e.g, growing crops w/o trading

Why is quality of life a limitation of using GDP?

Quality of life is a limitation of using GDP as GDP does not measure factors such as healthcare, overall well-being, education, environmental quality

What are the 2 ways of measuring National happiness?

Measuring National Happiness=

1. UK national wellbeing

2. relationships between real incomes & subjective happiness

What is UK national wellbeing- national happiness?

UK national wellbeing- countries e.g UK explored measures of national wellbeing to complement GDP- considering mental health, satisfaction, social connections

What is the relationship between real incomes & subjective happiness- national happiness?

Relationship between real incomes & subjective happiness= researcher suggested that HIGHER incomes are associated with INCREASED happiness

• e.g World Happiness Report ranks countries on income, life expectancy etc

What is the equation to measure real economic growth?

Equation for real economic growth=

nominal economic growth x (100/CPI)

Why is national income measured?

National income is measured to measure the output, expenditure and income of economy. The key measure of national income used in the Uk is GDP.

Where is national income used in/by?

National income is used in/by=

• used to test hypotheses & build economy models in order to increase understanding of how an economy works

• comparisons over time and between countries

• judgement about economic welfare e.g. growth in national income is usually equated to rise in standard of living

What are reaons why the accuracy of national income statistics is limited?

Reasons why the accuracy of national income statistics is limited=

• ‘hidden, black or informal economy

• home produced services

  • in many poor developing countries

  • in wealthier countries

• public sector

Why is the ‘hidden, black or informal economy’ a reason why the accuracy of national income statistics is limited?

The ‘hidden, black or informal economy’ a reason why the accuracy of national income statistics is limited=

taxes such as VAT impose a burden on workers & businesses. Some are tempted to evade taxes as they work in ‘hidden, black or informal economy’- where trade and exchange unreported to tax authorities and those collecting the national income statistics 

• common for workers to be self-employed and to under/not declare income at all 

• transactions in cash form

Why is home produced services in many poor developing countries a reason why the accuracy of national income statistics is limited?

Home produced services in many poor developing countries is a reason why the accuracy of national income statistics is limited=

official GDP per person appears extremely low as much economic activity is not traded/ recorded

• e.g. substinence farming (for one’s use)

Why is home produced services in wealthier countries a reason why the accuracy of national income statistics is limited?

Home produced services in wealthier countries a reason why the accuracy of national income statistics is limited=

In wealthier countries, like the UK, housework is excluded from national income statistics- so underestimation of national output

Why is the public sector a reason why the accuracy of national income statistics is limited?

Te public sector a reason why the accuracy of national income statistics is limited=

output is valued by the cost of production since services aren’t sold- gives misleading results

• if efficiency improves & costs fall (e.g. fewer nurses providing same/better care ), official national income statistics show drop in output, even though actual services remain the same/improve

What are the problems with comparing national income over time?

Problems with comparing national income over time=

• Prices

• Accuracy and presentation of statistics

• Changes in population

• Quality of goods and services

• Defence and related expenditures

• Income distribution

• Consumption and investment

• Externalities

  • PACQDICE ‘f u dice’

Why are ‘prices’ a problem with comparing national income over time?

Prices is a problem with comparing national income over time=

Prices tend to increase over time, so increase in national income doesn’t necessarily mean increase in number of goods and services produced in economy

• only increase in output if nominal rate of economic growth is greater than the inflation rate

Why is ‘accuracy and presentation of statistics’ a problem with comparing national income over time?

Accuracy and presentation of statistics is a problem with comparing national income over time=

as change in real income over time is affected by inflation rate, calculating national income and inflation rate can change over time

Why is ‘changes in population’ a problem with comparing national income over time?

Changes in population is a problem with comparing national income over time=

National income statistics are often used to compare living standards over time. To do this accurately, we must look at income per person.

• e.g. if the population doubles but the national income grows four times, people will be about twice as well off, not four times.

Why is ‘quality of goods and services’ a problem with comparing national income over time?

Quality of goods and services is a problem with comparing national income over time=

quality of goods and services can improve over time due to advances in technology. If prices fall as a result, national income may also fall, even though people’s living standards have actually improved.

Why is ‘defence and related expenditures’ a problem with comparing national income over time?

Defence and related expenditures is a problem with comparing national income over time=

UK’s GDP was higher during the Second World War than in the 1930s, but devoted to defence expenditure// much of that money was spent on the military. People didn’t actually have a better standard of living during the war. So, when looking at living standards, we need to consider how much of the national income is spent on things like defence or the police.

Why is ‘income distribution’ a problem with comparing national income over time?

Income distribution is a problem with comparing national income over time=

Increased national income for an economy as a whole may not mean that individuals have seen their income increase- income distribution is likely to change over time, which may/not lead to a better situation/ affair

Why is ‘consumption and investment’ a problem with comparing national income over time?

Consumption and investment is a problem with comparing national income over time=

Increasing standard of living by decreasing investment and increasing consumption, but decreasing investment is likely to decrease standard of living in the future

Why are ‘externalities’ a problem with comparing national income over time?

Externalities is a problem with comparing national income over time=

National income statistics don’t consider externalities (e.g pollution)

If national income doubled roughly every 25 years since 1945, if value of externalities has more than doubled over that time period, then rate of growth of S.O.L has less than doubled

• so develop a measure ‘green GDP’

What are the problems with comparing national income between countries?

Problems with comparing national income between countries=

• countries may use different accounting conventions to calculate national income

• quality of national income data varies enormously

• market exchange rates do not reflect purchasing power- distorted picture of living standards between countries

What does the market exchange rate undervalue?

The market exchange rate undervalues the value of local currency when it comes to buying a basket of goods on which people can survive

What is the Easterlin paradox? (Real incomes and subjective happiness)

Easterlin paradox=happiness rises with income only up to basic needs (food, shelter etc); after that, increase in income/consumption does not increase (long-term) happiness

• for e.g. in the UK, where living standards are already high, even if GDP doubled, people wouldn’t necessarily become happier

Why does relative income matter more than absolute income? (Real incomes and subjective happiness)

Relative income matters more than absolute income as= income and happiness depends on the people around us- people are happier when they earn more than others. Income is linked to social status and higher social status tends to make us happier.

What is GDP?

GDP is gross domestic product, the value of all goods and services produced domestically in an economy in a one-year period.