2.1 measures of economic performance

GROWTH

REAL GDP:

NOMINAL GDP:

REAL GDP: Measures the amount of goods and services produced in an economy in a year.

GDP stands for gross domestic product. It is the amount that is produced in an economy in a year. 

NOMINAL GDP: The total price of all goods and services produced in an economy.

Economic growth is an increase in real GDP.

Nominal GDP could have increased if output stayed the same if the economy was experiencing inflation.

Decrease in nominal GDP could be because of a decrease in output or decrease in prices (disinflation), nominal GDP is measured using prices.

Increasing in Nominal GDP could be caused by an increase in output or an increase in prices .

HOW TO CALCULATE ECONOMY GROWTH:

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

You remove the effects of inflation and changing prices. Left with increase in real GDP

CACLULATE GDP PER PERSON:

REAL GDP per capita- The total output produced in an economy in a year divided by the population.

Real GDP per capita = Real GDP per person

Total GDP/ number of people  = GDP per person

A decrease in the size of the population could lead to an increase in real GDP per capita. 

Using Real GDP can be misleading because it ignores the size of t he country’s population. Using real GDP per capital avoids this problem. 

Low living standards in China - China had a very high real GDP but a low real GDP per capita.  Their high population bought REAL GDP per capital brought down. 

GDP gross domestic product only looks at what is produced domestically.

GNI- Gross national income 

Gross national income = gross national product 

GNI = GDP + Net income from abroad 

GNI = GDP + Income received - income sent = GNI

Remittances - Money earned by workers which is sent home to family in another country.

National income = national expenditure = national output 

Initially, happiness increase as average income increases, after marginal increase in happiness fall. 

Easterlin paradox - A s income increases, happiness increases up to a point as people are able to afford important items like food and a home. However, the marginal happiness from each extra £ of income then fall as people spend money on things they don’t need which brings less happiness. 

EASTERLIN PARADOX - Marginal happiness from each extra unit of income will decrease when income reaches a certain level.

Therefore as income increases, marginal happiness decreases.

NATIONAL WELLBEING:

Office of national statistics uses national well-being survey to work out how happy the UK population is, its the estimate of average national happiness.

However, it isn’t the most accurate as it is based on subjective, normative questions.

Not all countries focus on increasing real GDP, some countries focus on increasing Gross National Happiness. It encourages a focus on improving standard of living.

ECONOMIC GROWTJ

PPP - Power purchasing parities. 

Economists use basket of goods to calculate the purchasing power parity and compare GDP data between countries.

Nominal GDP data is usually measured in different countries. This makes it particularly difficult to compare nominal GDP data as exchange rates are very volatile. 

Second difficulty is that nominal GDP does not reflect the  differences between price levels in each country. This makes it very difficult to compare as there is no way of knowing what each currency is worth in terms of the number of goods and services they will buy in each country.

Big Mac index: Annual nominal GDP per capita / big max .

2 DIFFICULTIES WHEN COMPARING NOMINAL GDP PER Capital data between countries:

Different price levels and volatile exchange rates. 

CALCULATING PURCHASING POWER PARITIES

To avoid problems when comparing nominal GDP per capita, more helpful to use purchasing power parity. 

A purchasing power parity of PPP between two countries tells us how much of one currency is needed to purchase a basket of goods compared to another country.

Best measure for making comparisons between economies is purchasing power parity.

An increase in LRAS is caused by an increase in the quantity of the factors of production. 

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