2.1.1

What is economic growth?

The rate of change of real GDP over time. It represents an increase in the productive capacity of the economy and the quantity of goods and services produced.

How is economic growth usually measured?

By the percentage change in real GDP per year.

What is Gross Domestic Product (GDP)?

The total value of goods and services produced within a country in a year.

What is the difference between real GDP and nominal GDP?

Real GDP is adjusted for inflation and shows actual output, while nominal GDP is measured at current prices and is not adjusted for inflation.

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

Total GDP is the total output of the economy, while GDP per capita is GDP divided by population and shows average output per person.

Why is GDP per capita a better indicator of living standards than total GDP?

Because it accounts for population size and shows the average income or output per person.

What is meant by value and volume measures of GDP?

Value measures are expressed in money terms at current prices, while volume measures adjust for inflation to show the real quantity of output.

What is Gross National Income (GNI)?

The value of goods and services produced by a country plus net income from overseas investments such as profits, interest and dividends.

Why may GNI be a better measure than GDP?

Because it includes income earned from overseas investments and subtracts income sent abroad.

Why do economists compare growth rates over time?

To determine whether an economy is expanding or contracting and assess economic performance.

Why do economists compare growth rates between countries?

To compare economic performance and living standards internationally.

What is Purchasing Power Parity (PPP)?

An exchange rate that compares how much a typical basket of goods costs in different countries.

Why are PPP-adjusted figures used in international comparisons?

Because they account for differences in cost of living between countries and give more accurate comparisons of living standards.

Example of a PPP comparison

The Big Mac Index compares the price of a Big Mac across countries.

Why might GDP data be inaccurate?

Some countries have poor data collection or calculation methods.

Why does GDP underestimate economic activity?

Because it excludes the informal or black economy.

Why might GDP underestimate living standards in developing countries?

Because subsistence farming and unpaid household production are not included.

Why can inflation measurement errors affect GDP comparisons?

Incorrect inflation figures mean real GDP may be slightly inaccurate.

Why do transfer payments reduce GDP’s usefulness for living standards?

Transfer payments redistribute income but do not increase output.

Why does income inequality limit GDP as a measure of living standards?

GDP may increase while only a small proportion of people benefit.

Why do improvements in product quality affect GDP comparisons?

Higher quality goods increase welfare but may not be fully reflected in GDP statistics.

Why do exchange rates create problems when comparing GDP between countries?

Market exchange rates may distort comparisons because cost of living differs between countries.

Why might government spending increase GDP without increasing welfare?

Spending such as defence increases GDP but may not improve living standards.

Why is GDP not a complete measure of wellbeing?

Because wellbeing depends on factors beyond income such as health and freedom.

What factors does the UN happiness report consider?

Real GDP per capita, health, life expectancy, having someone to count on, freedom to make life choices, freedom from corruption and generosity.

What is the UK national wellbeing programme?

A UK initiative launched in 2010 to measure people's wellbeing and quality of life.

What factors most affect UK wellbeing?

Self-reported health, relationship status and employment status.

What four questions are used to measure UK wellbeing?

Life satisfaction, happiness, anxiety and worthwhileness measured on a scale from 0 to 10.

What is the relationship between income and happiness?

Happiness generally increases with income at low income levels.

What is the Easterlin Paradox?

The idea that once basic needs are met, higher income does not significantly increase long-term happiness.

How does relative income affect happiness?

People’s happiness partly depends on their income relative to others around them.