2.1.1 Economic Growth

Define Economic Growth

Economic growth is the rate of change of output . It is an increase in the long term productive potential of the country which means there is an increase in the amount of goods and services that a country produces.

• Also known as an increase in real GDP

How is economic growth typically meadured?

This is typically measured by the

• percentage change in real GDP per annum .

• It can also be shown through the shift of PPF.

Define GDP

Gross Domestic Product: The standard measure of output, which allows us to compare countries. It is the total value of goods and services produced in a country within a year.

What is GDP an indicator of?

GDP is an indicator of the standard of living in a country.

What is GDP per capita?

GDP per capita is the total GDP divided by the number of people in a country.

How does GDP per capita grow?

GDP per capita grows if national output grows faster than population over a given time period, so there are more goods and services to enjoy per person

What is the difference between Nominal and Real GDP?

Real GDP strips out the effects of inflation whilst nominal GDP does not.

What is the formula for real GDP growth?

% change in real GDP growth = % change in nominal GDP growth - inflation rate

What are other national income measures?

• Gross National Income

• Gross National Product

What is Gross National Income?

GNI = nominal GDP + Net Income from abroad

The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends.

What is Gross National Product?

• The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically (GDP) and overseas.

• This means it is the value of all the goods produced by citizens of a country, whether they live in the country or not, whilst GDP is the value of all goods produced inside the country, whether they were produced by citizens of the country or not.

What are 2 ways comparisons about growth can be made?

• Over time

• Between countries

How do national income levels allow us to make comparisons over time?

• Changing national income levels will show us whether the country has grown or shrunk over a period of time

• Make judgements about economic welfare as growth in national income means a rise in living standards as the economy is producing more goods and services so people have access to more things.

• We use REAL GDP and REAL GDP PER CAPITA to make comparisons: When countries have a difference in population, a difference in total GDP doesn’t necessarily mean a difference in living standards so to make comparisons, we work out GDP per capita. It is possible for GDP to increase simply because of an increase in prices in the country and inflation is different in every country, so real GDP figures need to be calculated.

How can comparisons about growth be made between countries?

When countries have a difference in population, a difference in total GDP doesn’t necessarily mean a difference in living standards so to make comparisons, we work out GDP per capita. It is possible for GDP to increase simply because of an increase in prices in the country and inflation is different in every country, so real GDP figures need to be calculated.

Define Purchasing Power Parities.

An exchange rate of one currency for another which compares how much a typical basket of goods in the country costs compared to one in another country.

Why are PPPs useful?

These are useful when comparing countries as it takes into account the cost of living (how much has to be spent to maintain living standards), and so will help us better compare living standards.

Why will the difference between the highest and lowest GDPs be smaller when using PPP?

The difference between the highest and lowest GDPs will be smaller when PPP is used as poorer countries have a much lower cost of living than richer ones. For example, in Kenya £2 a day in their own currency is enough to survive on, whilst it isn’t in the UK.

What is an example of a PPP?

One example of this is the Big Mac Index, comparing the cost of the Big Mac throughout the world

What are the 5 problems of using GDP to compare standards of living.

1.1 Real GDP does not reflect changes in the population and so it is better to use real GDP per capita.

2.2. Real GDP does not show how money is distributed and so it ignores income inequality.

3.3. Real GDP ignores the type of goods produced and living standards will be lower if there is significant production of goods with negative externalities.

4.4. Real GDP does not measure the underground economy and so it ignores illegal transactions.

5.5. Real GDP does not include the subsistence economy where people produce goods to consume for themselves.

What is another measure for welfare?

National happiness

What were the 6 factors the UN happiness report found influencing national happiness?

• real GDP per capita

• health

• life expectancy

• having someone to count on

• perceived freedom to make life choices and corruption

• generosity

How is UK national Wellbeing measured and when was it launched?

In 2010, the UK Prime Minister launched the Measuring National Wellbeing report to measure how lives are improving. They found that self-reported health, relationship status and employment status most affect personal well-being.

What are the 4 key questions in the National Wellbeing Survey?

• life satisfaction

• anxiety

• happiness

• worthwhileness, where people answer on a scale of 0 “not at all” to 10 “completely”.

How often is the National Wellbeing report updated?

• The report is now updated on a quarterly basis, rather than annually.

What is the Easterlin Paradox?

An increase in consumption of material goods will increase happiness if basic needs aren’t met (shelter and food), but once these needs are met, an increase in consumption won’t increase long term happiness.

What is another interesting finding about income and happiness?

Another finding is that income and happiness depends on the people around us . For example, if you are the richest out of everyone you associate yourself with, then you will be happier than someone who has the exact same income but is the poorest out of everyone they associate with. Income is linked to social status and higher social status tends to make us happier.

Richard Leynard