2.1.1 Economic growth

How is economic growth measured

Rates of change of real GDP - increase in the long term productive potential of the country, which means increase in amount of goods and services a country produces

Usually measured by percentage change in real GDP per annum (shift in PPF)

What is GDP? Different types?

Gross Domestic Product: a standard measure of output, allowing comparison between countries. It is the total value of goods and services produced in a country over a period of time

• Total vs per capita: total represents the overall GDP of a country, whilst per capita is the GDP per household (total / no. of people)

GDP per capita grows if national output grows faster that population over a period of time

• Real vs nominal: real does not take into consideration effects of inflation (adjusted), whilst nominal does (non-adjusted)

Real GDP better for looking at long-term growth without inflation volatility (compared to a base year price)

• Volume vs value: volume is the size of basket of goods and services produced (excluding price), whereas value is the monetary cost of the basket of goods and services - i.e. value is equal to volume times current price level

Other national income measures?

• Gross national income (GNI)

The value of goods and services produced by a country over a period of time (GDP) PLUS net overseas interest payments and dividends

(I.e. adds what a country earns from overseas investments and remittances, but subtracts what foreigners earn and send home)

• Gross national product (GNP)

The value of goods and services produced by citizens of a country, whether they live in the country or not, over a period of time

Comparison of rates of growth between countries and over time

Between countries:

• It is important to use real, per capita GDP for comparisons between countries’ growth

• Different countries have different populations, so a difference in total GDP doesn’t necessarily mean a difference in living standards - inflation also differs between countries and may just reflect rising prices not growth

Over time:

• Also use real, per capita GDP

• If not, a rise in population could cause total GDP to rise without a rise in living standards

• If we use nominal GDP, inflation could give the false impression of GDP growing without rise in output of goods and services

What is PPPs? Why is it used?

Purchasing Power Parities: the difference in exchange rates which shows how much a typical basket of goods in one country costs compared to the same basket of goods in another country (e.g. Big Mac Index)

• Takes into account cost of living, which differs between countries, making better to compare living standards (e.g. 2 pounds in Kenya in their own currency is enough to survive a day, whilst it isn’t in the UK)

• Therefore, the difference between highest and lowest GDPs (PPP-adjusted) is smaller, as poorer countries have a lower cost of living

Limitations of using GDP to compare standards of living

1. Inaccuracy of data (tend to underestimate GDP)

• Poorer countries are inefficient at collecting data, and tend to have ‘hidden’ markets where work is undeclared for tax reasons

• GDP does not take into account informal and home-produced services (e.g. subsistence farmers and cash-in-hand jobs)

• Errors in calculating inflation rate means real GDP will be inaccurate, and methods of calculating GDP differ between countries

2. Inequalities

• Increase in total GDP could come from one group of people only, so growth in national income may not increase living standards of the whole country

3. Quality of goods and services

• The quality of goods and services is higher now than many years ago, but real prices (GDP) have not increased with quality

• Due to technological improvements, prices have fallen, suggesting falling living standards, which is not the case

4. Comparing different currencies

• Without PPPs, there are issues over which unit should be used to compare figures (usually converted to US dollars)

5. Spending

• Some expenditure, e.g. defence, does not increase standard of living but increases GDP

Other factors like education, also improve standard of living, but not reflected in GDP

What is used to measure national happiness in the UK?

National Wellbeing Report, where people answer 4 key questions about life satisfaction, anxiety, happiness, and worthwhileness, between a scale of 0 to 10. (In 2026, people are generally happy, but anxiety still remains post-pandemic)

What is the link between real incomes and subjective happiness?

• Happiness and income tend to be positively related at low incomes (i.e. if you are poor and your income rises, happiness rises by a larger proportion)

• At higher levels of income, happiness may rise less or none at all relative to increases in income (because material needs are met)

• Therefore, if GDP doubles in the UK, happiness may not double, as standard of living is relatively high

• Other factors like relationships, social status, etc, become main source of happiness